Iffliiliili 


i!ii)iiii 


iiit 


lliii! 


f 


W 


WMm 


k 


m 


ii 


rrrnTTTi 


iiili- 


mm 


mm 


iiiiilii 


MOXF.Y    AND    ITS    LAWS: 


EMBRAC1>'G 


A   HISTORY   OF   MONETARY   THEORIES, 


AND 


A    IIIS'n^KY    OF    THE    CURRENCIES    OF    THE 

LNITED    STATES. 


BY 

HENRY    V.   POOR. 


1I«  koowcth  not  the  Uw   who  kuoweth  not  the  reason  thereof. 

Lord  Chief  Jcstice  Coke. 


NEW   YORK: 
II.  V.  AND    II.  ^Y.  POOR, 

68    BUOADWAT. 

LONDON:    ttEXKY  S.  KLNG  AND  CO.,  65  CORNHLLL. 

1877. 


Copyright, 

By  n.  V.  ASD  H.  W.  rooR. 

1877. 


Cambridge : 
Press  of  John  Wilson  &>  Soft. 


T) 


TO 


GEORGE   S.   COE, 


PBESIDENT  OF  THE  AMEEICAK  EXCHANGE  BASK,  AKD  CHAIRMAN  OF  THE 
KEW  TOBK  CLEARING  HOUSE  ASSOCIATIOK, 


US    TOKEN    OF    ESTEEM    FOR   HIS    CHARACTER,  AND    IN    ACKNOWLEDGMENT    OF    HIS 
■*=  EARNEST  AND  INTELLIGENT  LABORS  FOR  THE  REFORMATION  OF 


OUR  CURRENCY, 


THIS    WORK    IS    RESPECTFULLY    INSCRIBED. 


«""? 


P  E  E  F  A  C  E. 


In  the  following  pages  the  subject  of  Money  has  been 
treated  as  coming  within  the  range  of  the  exact  sciences; 
the  conclusions  being  assumed  to  be  in  the  nature  of 
demonstrations.     That  they  wholly  contradict  those  laid 
down  in  the  books,  which  have  been  accepted  as  funda- 
mental truths  for  more  than  two  thousand  years,  is  due 
to  the  fact  that  a  subject  which  could  only  be  made  to 
yield  to  rigid  analysis  has  been  treated  after  the  manner 
of   Aristotle  and  the    Schools.      Although  the  laws  of 
Money  are  assumed  to  be  sufficiently  laid  down  in  the 
first  part  of   the  work,  the  writer,  from  the  universal 
prevalence  of  erroneous  opinions,  has  lost  no  opportu- 
nity of  illustrating  them  in  the  discussions  which  follow. 
If   he   have   not    in   all   cases    clearly    established   the 
connection  between  his   conclusions   and   premises,  the 
reason  will,  he  believes,  be  found  in  the  fact  that  he 
has  not,  with  all  his  efforts,  yet  been  able  entirely  to 
emancipate  himself  from  the  methods  of  the  Economists 
and  Schoolmen. 

Brookline,  Mass.,  1877. 


TABLE    OF    CONTENTS. 


[The  indented  lines  have  reference  to  the  views  or  opinions  of  other  writers.] 


THE  LAWS  OF  MONEY. 

Page 
The  desire  to  possess  gold  and  silver  an  original  instinct  stronger  than 

that  felt  for  any  other  kind  of  property 1 

This  universal  desire  renders  them  the  universal  equivalent  —  money  .  .  2 
The  grounds  of  tliis  preference,  their  beauty  and  the  uses  to  which  they 

can  be  applied 2 

Other  qualities  fitting  them  to  serve  as  money 2 

Illustration  of  the  uniformity  of  their  value  (note) 2 

From  their  durability  they  become  the  reserves  of  society 2 

Illustrations  of  their  value  as  reserves  (note) 3 

Errors   in   monetary  science   have  arisen  chiefly  from  overlooking  their 

universal  attractiveness 3 

Necessity  to  social  and  material  progress  of  some  article  or  articles  for 

which  a  supreme  preference  is  felt 4 

Demanded   in   exchange   for  all   other  articles,  and   in  discharge  of  all 

contracts 5 

Their  value  absoldte  ;  depending  upon  cost  alone 6 

That  of  all  other  articles  relative  ;  depending  upon  cost  and  demand   .     .  6 

Their  value  being  absolute,  they  are  the  standards  of  all  other  values  .    .  6 

Standards  of  value  and  media  of  exchange  the  same  things 6 

Misleading  influence  of  the  term  "medium  of  exchange  "  (note)   ....  6 

Prime  factors  in  the  creation  of  wealth  and  in  social  progress 6 

Always  in  demand  at  interest  as  the  basis  of  reproduction 7 

The  demand  tbr  capital  increases  as  natural  laws  are  unfolded 8 

The  importance  of  the  precious  metals  vastly  increased  by  interest,  paid  in 

kind,  on  loans  of  them 8 

Such  loans  transfer  the  actual  possession  of  capital  from  the  owner  to  the 

borrower 8 

They  become  in  this  way  the  highest  guarantees  for  the  peace  and  order 

of  society 8 

Provision  for  the  future  to  be  made  only  by  contracts  payable  in  them,  with 

interest  payable  in  kind 9 

Without  them,  there  could  have  been  neither  civilization  nor  continuity  of 

history 9 

Contracts  in  them  authenticated  by  written  instruments 9 

Hence  the  origin  of  paper  money 10 

Exchanges  must  be  made  at  tlie  standard,  but  may  be  made  without  the 

actual  intervention  of  the  precious  metals 10 

Their  use  always  barter 10 


Viii  TABLE   OF   CONTEXTS. 

Their  use  as  money  double  barter 10 

Importance  of  avoiding  tlieir  actual  intervention  in  exchanges 10 

The  manner  in  which  tliis  is  effected 11 

Sketch  of  history  of  coinage  (note) 11 

Bills  of  exchange 11 

Their  use  in  commerce  between  distant  communities  dispenses  with  that  of 

a  corresponding  amount  of  coin 13 

Not  presently  due 13 

Currencies  between  communities  widely  separated 13 

The  mode  in  which  they  serve  as  such 13 

Based  upon  or  symbolize  merchandise,  and  retired  by  its  use 14 

Producers  of  merchandise  the  drawers  of  bills 14 

The  holders  of  bills  entitled  to  the  specific  thing  drawn  against 14 

Bills  not  adapted  to  serve  as  local  currencies 14 

Such  currencies  required  to  be  of  every  denomination,  and  payable  presently, 

as  they  do  not  secure  to  their  hohler  specific  articles  of  merchandise  .     .  14 

Cannot,  like  bills  of  exchange,  be  issued  by  producers 14 

To  be  issued  by  parties  possessing  capital,  and  not  subject  to  the  risks  of 

production  and  trade 15 

Issued  in  great  part  by  banks 15 

Description  of  tlie  mode  of  their  issue 16 

Banks  do  not  pay  out  capital  in  making  their  loans 10 

These  are  made  by  an  exchange  of  their  notes,  presently  due,  for  the  bills  of 

their  customers,  due  at  a  future  day 16 

Retired  in  the  payment  of  the  bills  in  the  discount  of  which  they  are  issued  17 
Makers  of  bills  virtually  undertake  to  retire  the  notes  issued  in  their  dis- 
count    17 

All  these  operations  based  upon  merchandise 17 

The  instruments  by  which  they  are  conducted  paper  money — ccrrexcy  .  17 
So  long  as  they  represent  merchandise  their  movement  regular  and  au- 
tomatic, and  they  are  retired  without  the  intervention  of  coin  ....  17 
No  distinction  made  by  the  public  between  currencies   where   there   are 

several  issuers 18 

Banks  discharge  obligations  arising  between  themselves  by  mutual  offset    .  18 

Only  balances  arising  between  them  paj'able  in  coin 18 

Bills  and  notes  of  Banks  differ  chiefly  in  time  of  payment 18 

Interest  paid  by  the  borrower  on  all  issues  of  currency 19 

Currency  the  equivalent  of  capital  to  the  borrower 19 

The  effect  of  currency  to  reduce  prices 19 

Coin  reserves  of  Banks 20 

These  never  to  be  made  the  basis  of  loans 20 

Bear  only  a  small  ratio  to  the  amount  of  loans 20 

Hence  a  change  in  their  amount  followed  by  a  far  greater  one  in  the  amount 

of  currency ' 20 

Profit  of  Banks 21 

Advantages  of  a  currency  issued  by  them  in  reducing  prices 21 

All  merchandise  entering  into  consumption  should  be  symbolized  ....  24 

Amount  of  symbolic  currency  in  Great  Britain 24 

Reserves,  their  proper  amount,  and  how  maintained 25 

Deposits,  how  they  arise 27 

No  difference  but  in  form  between  notes,  and  checks  drawn  against  deposits  29 

Necessity  of  division  of  labor  in  distribution  as  in  production 29 

Cumulative  symbols  representing  the  same  merchandise 30 


I 


TABLE   OF   CONTEXTS.  ix 

Currencies,  like  bills  of  exchange,  only  instruments  arising  in  production 

and  distribution „, 

Distinction  between  capitalists  and  Banks '     '  si 

The  manner  in  which  banking  capital  may  be  provided .*  30 

This  always  in  the  hands  of  the  public  till  Banks  go  into  liquidation  .     .'    .'  33 

Bills  proper  to  be  discounted *  go 

Effect  of  discounting  accommodation  bills 33 

Inflation  and  contraction  which  result qa 

Disastrous  consequences o- 

Of  the  discount  of  bills  given  in  the  purchase  of  real  property 36 

Of  the  discount  of  bills  given  in  the  purchase  of  securities 38 

Cause  of  the  failure  of  Banks  based  upon  real  estate  or  securities    ....  38 
No  bills  to  be  discounted  but  those  given  for  merchandise  entering  into  con- 
sumption         on 

That  a  currency  may  be  convertible,  the  means  therefor  must  be  provided 

previous  to  its  issue 39 

Of  the  discount  of  bills  given  in  the  purchase  of  merchandise  not  in  demand 

for  consumption on 

Short  bills  only  to  be  discounted 4q 

Banks  by  discounting  bills  not  properly  based  responsible  for  all  the  great 

fluctuations  in  production  and  trade 41 

Disastrous  moral  effects  of  fictitious  ciirrencies 42 

Limited  functions  of  governments  in  the  matter  of  symbolic  currencies  .     .  42 
Should  forbid  the  discount  of  bills  not  based  upon  merchandise  and  having 

more  than  four  months  to  run 43 

Or  such  as  will  not  mature  within  the  time  required  for  the  distribution  to 

consumers  of  the  merchandise  they  represent 43 

Governments  can  never  issue  a  convertible  currency,  nor  one  that  is  not  at  a 

discount  from  the  standard  of  coin 43 

Wide  difference  between  currencies  issued  by  governments  and  by  Banks  .  44 

The  former  never  issued  in  the  discount  of  bills 44 

All  government  currencies  the  representatives  of  debt,  not  of  capital  ...  44 

Governments  the  only  parties  to  retire  the  currencies  issued  by  them      .     .  45 
They  are  made  legal  tender  as  the  only  means  by  which  they  can  be  got 

into  circulation 45 

Their  issue  always  favorably  received 45 

Symbolic  currencies  measure  the  means  of  consumption  of  a  people   ...  46 

Disastrous  effects  of  a  currency  that  does  not  symbolize  capital      ....  47 

Further  difference  between  government  and  Bank  currencies 47 

Interest  always  paid  Banks  on  loans  of  their  currencies 47 

Never  paid  on  the  issue  of  currencies  by  governments 47 

All  government  currencies  in  their  depreciation  involve  a  loss  greater  than 

interest  on  their  amount 48 

Why  governments  cannot  issue  convertible  currencies 50 

Constant  and  excessive  fluctuations  the  law  of  all  government  currencies    .  52 

They  reduce  all  business  operations  to  the  hazards  of  chance 52 

The  great  problem  of  society  distribution,  not  production 53 

A  flexible  currency  a  representative  currency 54 

A  government  currency  never  flexible,  as  it  bears  no  relation  to  the  means 

of  consumption 55 

The  value  of  all  currencies  depends  upon  their  quality,  not  quantity  ...  56 
Unlike  measures  of  weight  and  extension,  money,  as  tlie  measure  of  value, 

passes  in  every  exchange 56 


X  TABLE    OF   CONTENTS. 

A  currency  of  government  notes  nerer  issued  for  the  purpose  of  facilitating 

exclianges 5' 

Always  a  forced  loan ^7 

Always  superfluous S7 

Their  price  their  real  or  estimated  value 57 

Their  value  never  affected  by  the  number  of  exchanges  taking  place  ...  67 

Wholly  dependent  upon  the  credit  of  the  issuer &8 

Usually  repudiated 68 

Symbolic  money  simply  the  record  of  transactions 59 

The  propriety  of  its  issue  shown  by  its  return  in  the  payment  of  the  bills  in 

the  discount  of  which  it  was  issued 69 

Every  possessor  of  merchandise  competent  to  issue  a  convertible  currency  .  69 

The  greater  part  of  the  currencies  to  be  issued  locally 69 

Convertible   currencies  will   never  circulate  far  from  the  place  of  their 

issue 69 

Erroneous  assumptions  in  reference  to  money 60 

Methods  followed  in  the  investigation  of  its  laws  those  of  the  Schoolmen  Gl 
Their  exposure  and  refutation  the  necesiTry  condition  of  progress  in  mone- 
tary science 61 


HISTORY  OF  MONETARY  THEORIES. 

Aristotle,  350  B.C. 

The  source  of  all  monetary  theories 62 

Acquisitions  according,  and  opposed,  to  nature 62 

Acquisition  of  money  unnatural 63 

Money  devised  from  the  necessity  of  its  use 63 

Money  not  wealtli 63 

Money-getting  a  servile  art 64 

Object  of  all  acquisition  two-fold 65 

One  for  its  own  sake 65 

The  other  for  use  in  the  family 65 

The  former  justly  censurable  ;  the  latter  commendable 66 

Usury  —  money  born  of  money  —  most  contrary  to  nature 65 

Falseness  of  Aristotle's  method 65 

His  definitions  of  money  pure  assumptions 66 

Solved  all  questions  by  dialectics 65 

His  successors  the  Schoolmen  and  Political  Economists 66 

The  unscientific  character  of  his  mind 66 

Childishness  and  absurditj'  of  his  illustrations 66 

The  great  obstacle  in  the  way  of  all  progress 66 

Complete  failure  of  the  Aristotelian  method  (Whewell) 68 

Bacon  in  reference  to  (note) 68 

The  legitimate  founder  of  the  Schoolmen  (Whewell) 69 

Becomes  an  authority  with  the  Church 70 

Methods  of  the  two  the  same 70 

Each  alike  fatal  to  scientific  progress 70 

Emancipation  from  either  could  come  only  from  the  new  races 70 

Bacon  the  first  to  teach  the  proper  method  of  scientific  investigation  ...  70 


TABLE   OF   CONTEKTS.  xi 

Difference  between  his  method  and  that  of  Aristotle 70 

Efnancipation  of  the  exact  sciences  from  the  Aristotelian  methods  ....       71 

In  the  moral,  tJie  methods  of  the  Schoolmen  still  prevail 71 

No  considerable  progress  made  in  any  but  Law  (note) 71 

Unlawfulness  of  usury  first  attacked  by  Bentham 73 

Money  not  yet  emancipated  from  the  teachings  of  Aristotle 73 

Permanence  of  theories  in  themselves  wholly  absurd  (note) 73 

John  Locke. 

The  first  writer  calling  for  notice  after  Aristotle 74 

Reasons  for  the  discussion  of  money  by  him 74 

Metallic  currency  in  England  in  1696 74 

Disastrous  consequences  of  its  debasement  (Macaulay) 75 

Its  reformation  proposed 77 

Opposition  headed  by  Lowndes 73 

His  proposition  for  lowering  the  standard 78 

Locke  called  upon  to  refute  him 73 

Standard  value  of  tlie  coinage  to  be  maintained 79 

'    Government  to  assume  the  loss 79 

The  people  for  a  time  without  a  currency  (Macaulay) 80 

The  inconvenience  and  distress 80 

John  Law. 

"  Money  and  Trade  Considered,"  1700 82 

His  object  to  supply  Scotland  with  capital 82 

The  value  of  gold  and  silver  their  value  in  barter 82 

They  acquire  additional  value  from  their  use  as  money 82 

The  first  proposition  correct 83 

The  last  not 83 

Objection  to  gold  and  silver  as  money 83 

Perishable  goods  better  fitted  to  serve  as  such 83 

His  assumptions  opposed  to  the  fact 84 

Adam  Smith  greatly  indebted  to  Law 84 

Proposition  for  a  Land  Bank 35 

Its  impracticability 8g 

Suits  his  principles  to  his  necessities 35 

"  Money  not  the  value  for  which  goods  are  exchanged,  but  the  value  by 

which  they  are  exchanged  " 86 

Land  better  than  silver  as  a  basis  of  currency 37 

Money  for  domestic  exchanges  may  differ  from  that  used  in  foreign 

exchanges 37 

These  propositions  opposed  to  the  fact 37 

Goes  to  France,  and  founds  a  Bank  based  upon  coin 88 

For  a  time  eminently  successful 33 

Holds  that  its  issues  might  be  made  the  basis  of  industrial  enterprises     .     .  89 

His  Bank  becomes  an  instrument  of  the  government 89 

Its  disastrous  failure 39 

The  Mississippi  scheme 39 

David  Hume. 

"  Essays,  Moral,  Political  and  Literary,"  1752 89 

Value  no  necessary  attribute  of  money 89 


Xii  TABLE    OF   CONTESTS. 

Money  a  thing  of  no  importance ^ 

Its  value  imaginary ^ 

An  imaginary  value  no  value "1 

Hume's  plan  for  debasing  the  currency ^^ 

His  untrustwortliiness  shown  by  it " 

Prices  reduced  by  reducing  the  amount  of  the  currency 95 

Prices  increased  by  reducing  the  currency 9o 

Money  is  in  ratio  to  products  exchanged 9<> 

Paper  money  displaces  a  corresponding  amount  of  coin 9o 

Does  not  displace  a  corresponding  amount  of  coin 9~ 

His  views  upon  money  wholly  erroneous 98 

His  ignorance,  and  indifference  to  truth 98 

The  anomalous  character  of  the  Bank  of  England 98 

Its  success  due  to  the  practical  sense  of  its  managers 99 

(For  Bank  of  England,  see  infra,  p.  183.) 

Adam  Smith. 

«  Wealth  of  Nations,"  1776 99 

Assumes  to  construct  an  universal  science 99 

Buckle's  account  of  his  plan 99 

Adopts  the  deductive  method       100 

Invention  of  money  consequent  upon  division  of  labor 101 

Any  substance  may  be  used  therefor 101 

Divisibility  of  the  material  the  most  important  attribute 102 

Coinage  an  essential  attribute  of  money 102 

Invention  of  money  impossible 103 

Its  use  preceded  division  of  labor 103 

The  universal  equivalent  is  money 105 

Labor,  as  an  abstract  notion,  the  real  measure  of  values  ;  coin,  the  appar- 
ent measure 107 

The  measure  of  value  a  palpable  object 108 

Further  illustration  of  this  subject 108 

Corn  a  better  measure  of  value  than  coin 109 

Perpetual  rents  should  be  made  in  corn 110 

Fluctuates  more  from  year  to  year  :  less  from  age  to  age 1 10 

The  money  or  coin  price  the  one  by  which  transactions  are  made     .     .     .  110 

The  universal  preference  for  the  precious  metals  renders  them  money      .     .  110 

The  convenient,  the  natural  medium  of  exchange 110 

Contradictions  in  which  Smith  involved  himself HI 

Puerility  of  his  illustrations  and  arguments 112 

The  price  of  every  commodity  resolves  itself  into  wages,  profit,  and  rent  112 

The  gross  and  neat  revenue  of  society 113 

The  expense  of  maintaining  its  fixed  capital  no  part  of  its  neat  revenue  113 
The  expense  of  maintaining  its  circulating  capital  may  form  a  part  of  its 

neat  revenue 113 

Its  circulating  capital  divided  into  four  parts,  — money,  provisions,  mate- 
rials, and  finished  work 113 

Money  is  the   only  one  the  maintenance   of  which   can   occasion  any 

diminution  in  the  neat  revenue 11-t 

It  forms  no  part  of  either  the  gross  or  neat  revenue 114 

It  is  the  wheel  of  circulation,  not  the  thing  circulated 11-t 

Smith's  elements  of   price  and    classifications  of   property  arbitrary  and 

absurd 115 


I 


TABLE   OF   CONTEXTS.  xiii 

Money  the  highest  form  of  finished  work 115 

The  legal  division  into  "  real  "  and  "  personal  "  the  only  proper  one    .     .     .  115 
Defect  of  Smith  and  tlie  Economists  in  overlooking  interest  as  an  element 

in  price 115 

The  expense  of  maintaining  all  kinds  of  property  is  In  ratio  to  its  cost     .     .  115 

Money  essential  to  the  value  of  all  other  commodities 116 

Need  not  be  actively  employed  to  be  productive 117 

Groundlessness  and  absurdity  of  Smith's  assumptions  and  conclusions     .     .  118 

Distinction  between  real  and  nominal  prices 119 

A  person's  income  is  not  the  money  he  receives 119 

Absurdity  of  such  distinctions 120 

Paper  money  a  substitute  for  metallic  money 121 

That  of  Banks  and  bankers  "  seems  "  to  be  the  best 121 

Advantages  of  such  substitution 121 

Mode  of  its  issue 121 

It  circulates  upon  the  credit  of  the  issuer 121 

Only  occasionally  returns  for  redemption 121 

Reserves  necessary  to  be  held 121 

The  word  "  seems  "  illustrative  of  Smith's  method 122 

"Wholly  failed  to  comprehend  the  nature  of  paper  money 122 

All  notes  issued  return  regularly  for  redemption 123 

If  good  bills  only  be  discounted,  the  notes  return  in  their  payment      .     .     .  123 

Manner  in  which  paper  money  may  be  substituted  for  coin 123 

An  amount  of  coin  equal  to  the  issue  liberated  from  use 123 

The  channels  of  circulation  will  only  hold  a  certain  quantity  of  money  .  123 

If  there  be  too  much,  they  will  overflow 124 

The  available  capital  of  a  country  increased  by  the  amotmt  issued  .     .    .  124 

Mode  of  issue  of  a  symboUc  currency 124 

Never  issued  in  the  manner  supposed  by  Smith 124 

A  growth,  not  an  improvisation 125 

Its  issue  no  increase  of  the  relative  amount  of  money 125 

The  channels  of  circulation  never  overflow 125 

The  holders  of  money  never  send  it  abroad  as  the  condition  of  using  it  as 

capital 125 

Exported  in  consequence  of  previous  expenditures 126 

Smith  wholly  misconceived  the  object  and  efiect  of  paper  money     .     ,     .     .  126 
Provision,  material,  and  finished  work,  the  only  things  that  can  set  indus- 
try in  motion 126 

Money  neither  of  these 126 

"Wages  do  not  consist  of  money 126 

Money  only  a  small,  and  always  the  most  unproductive  part  of  a  nation's 

capital 126 

Money  material  for  the  reason  that  it  is  always  going  into  the  arts      .     .     .  127 

Capital,  as  it  can  always  be  loaned  at  interest 127 

The  chief  thing  to  set  industry  in  motion 127 

All  kinds  of  capital  necessary  to  the  operations  of  society  equally  valuable 

and  equally  productive 127 

The  proportion  of  money  to  the  merchandise  circulated  by  it 123 

The  advantage  of  substituting  paper  for  gold 123 

Proper  limit  of  paper  money  the  amoimt  of  merchandise  to  be  symbolized   .  123 

Tendency  of  all  commercial  countries  to  symbolize  their  products  .     ...  129 

Paper  money  (unless  legal  tender)  cannot  be  substituted  for  coin    ....  129 

The  greater  the  amount  of  paper,  the  greater  that  of  coin 129 


xiv  TABLE   OF   CONTENTS. 

Advantages  resulting  from  the  use  of  the  former 129 

The  amount  of  paper  money  can  never  exceed  that  of  the  coin  it  displaces  129 

All  excess  immediately  drawn  in  coin 129 

Absurdity  of  such  assumptions 130 

Disproved  by  reference  to  the  currencies  of  England  and  Scotland  ....  130 

Paper  money  used  in  foreign  as  in  domestic  commerce 132 

Only  the  excess  of  paper  money  issued  returns  to  the  issuer 132 

The  coin  liberated  will  go  abroad 132 

Increased  cost  of  maintaining  excessive  issues 132 

There  can  be  no  excess  of  symbolic  money 133 

All  regularly  returns  for  redemption 133 

The  amount  of  notes  issued  has  nothing  to  do  with  their  return 133 

A  currency  not  symbolic  is  in  excess  to  its  whole  amount 133 

Cost  of  maintaining  a  currency  in  ratio  to  its  amount 13-4 

The  advances  that  Banks  may  make  to  merchants  never  to  exceed  the 

■   amount  of  coin  which  would  otherwise  be  in  circulation     ....  135 
Advances  to  be  made  to  merchants  only  as  the  representatives  of  manu- 
facturers    13t> 

To  equal  the  amount  of  merchandise  entering  into  consumption 135 

Paper  money  does  not  supersede,  but  supplements  the  use  of  coin  ....  136 

A  community  will  "  absorb  "  all  the  money  it  can  get 136 

The  promptness  in  payment  of  merchants  would  show  that  an  excess  of 

currency  had  not  been  issued 136 

Such  promptness  for  a  time  rather  a  proof  of  excessive  issues 137 

All  reserves,  and  all  gold  and  silver  used  as  currency,  dead  stock     .     .     .  138 

The  object  of  banking  to  convert  this  dead  stock  into  active  capital      .     .  138 

Paper  money  a  wagon-way  through  the  air 138 

Increase  of  money  increases  the  price  of  commodities 138 

The  quantity  of  paper  money  added  to  the  circulation,  always  to  equal 

the  amount  of  coin  taken  from  it 138 

Absurdity  of  these  propositions 138 

Gold  and  silver  as  money  never  dead  stock 138 

"  The  principles  of  the  Commercial  or  Mercantile  System  " 139 

The  assumed  science  of  Political  Economy  a  modern  one 139 

The  Greeks,  though  addicted  to  commerce,  seldom  speculated  upon  subjects 

coming  within  the  range  of  the  economic  sciences 140 

The  Romans  never  a  commercial  or  manufacturing  people 140 

The  overthrow  of  the  Empire  by  the  Northern  races 140 

Commerce  and  trade  highly  regarded  by  the  latter 140 

Freedom  the  necessary  condition  and  result  of  the  commercial  spirit   .     .     .  140 

Contempt  of  the  Greeks  and  Romans  for  the  useful  industries 140 

Illustration  from  Aristotle 141 

Disastrous  influence  of  his  teachings 141 

Contrast  between  the  old  and  new  races 142 

High  estimation  placed  by  the  latter  on  gold  and  silver 142 

These  could  only  be  acquired  by  commerce 142 

Efforts  to  acquire  them  seconded  by  legislation 142 

Hence  the  rise  of  the  so-called  "Mercantile  System" 142 

The  error  not  in  the  importance  attached  to  them,  but  in  the  modes  in  which 

they  were  sought  to  be  acquired 142 

These  in  harmony  with  the  spirit  of  the  age 143 

Usury  everywhere  held  in  detestation  and  forbidden 143 


TABLE   OF   CONTENTS.  XV 

Sketch  of  the  history  of  usury  (note) 143 

Principles  of  the  Mercantile  System 144 

1st,  That  wealth  consisted  in  gold  and  silver 144 

2d,  That  these  can  be  brought  into  a  country  having  no  mines,  only  by  a 

favorable  "  Balance  of  Trade  " 144 

Hence  it  became  the  great  object  of  Political  Economy  to  increase  expor- 

tations  .and  diminish  importations 144 

1st,  By  restraints  upon  the  importation  of  such  articles  as  could  be  pro- 
duced at  home 147 

2d,  By  restraints  upon  importations  from  countries  with  which  trade 

was  considered  disadvantageous 147 

Exportatious  to  be  encouraged,  — 

1st,  By  drawbacks 147 

2d,  By  bounties 147 

3d,  By  treaties  of  commerce 147 

4tli,  By  planting  of  colonies * 147 

The  six  preceding  provisions  the  means  for  increasing  the  "  Balance  of 

Trade" 147 

Smith's  opposition  to  the  Mercantile  System,  — 

From  the  inadequacy  of  its  object 147 

From  the  inadequacy  of  tlie  means  to  their  object 147 

Argument  against  the  Mercantile  System 147 

The  precious  metals  not  wealth 147 

The  idea  that  they  were  arose  from  the  double  function  of  money    .     .     .  147 

Illustration  of  this  distinction 148 

Money  the  measure  of  value  and  money  the  instrument  of  commerce,  the 

same 149 

A  person  rich  in  proportion  to  the  amount  he  holds 150 

Money  an  instrument  of  commerce  by  reason  of  its  value 150 

Absurdity  of  Smith's  propositions  and  conclusions 151 

A  sale  of  goods  for  money  an  exchange  of  equal  values 152 

Absurdity  in  asserting  the  universal  object  of  acquisition  to  possess  no 

value 154 

Doctrines  of  Smith  and  the  Economists  in  reference  to  "  Balance  of  Trade  " 
the  necessary  sequence  of  those  held  by  them  in  reference  to  the 

value  of  money 154 

Would  not  allow  that  to  be  an  object  of  commerce  which  was  not  even  a 

subject  of  commerce 154 

Importance  of  an  equilibrium  of  the  precious  metals  the  world  over    .     .     .  156 

How  this  is  to  be  maintained 157 

Illustrated  by  the  action  of  the  Bank  of  England 157 

Governments  incompetent  to  control  the  movements  of  the  precious  metals  158 

The  Bank  competent 158 

Its  action  a  triumphant  vindication  of  the  correctness  of  the  doctrine  of 

"  Balance  of  Trade  " 158 

Free-trade  and  Protection 158 

Smith  assumed  to  have  demonstrated  the  superiority  of  the  former      .     .     .  158 

No  such  demonstration  possible 158 

The  opposing  doctrines  not  the  result  of  natural  laws,  but  of  conditions  .     .  169 

Those  possessed  of  superior  capital  and  skill.  Free-traders 159 

Those  lacking  and  seeking  to  acquire  them.  Protectionists 159 

The   same  parties  Free-Traders   in    one    country    and  Protectionists  in 

another 160 


XVI  TABLE    OF   CONTENTS. 

The  age  of  Protection,  the  heroic  one 160 

That  of  Free-Trade,  one  of  realization  or  enjoyment 160 

Free-Trade  constantly  gaining  at  the  expense  of  Protection 161 

The  question  as  at  present  treated,  insoluble 162 

Smith  had  the  same  contempt  for  merchants  and  manufacturers  as  Plato 

and  Aristotle 162 

"  The  sneaking  arts  of  underling  tradesmen  erected  into  maxims  for  the 

conduct  of  a  great  empire." 162 

"  The  mean  rapacity  and  monopolizing  spirit  of  merchants  and  manu- 
facturers " 162 

"  The  capricious  ambition  of  kings  and  ministers  not  more  fatal  to  the 

repose  of  Europe" 163 

Untruthfulness  of  such  assertions 163 

Merchants  always  the  champions  of  commercial  and  political  freedom     .     .  163 

Merchants  the  authors  of  the  spirit  of  protection  and  monopoly      .     .     .  164 
Teach  the  doctrine  of  buying  in  the  dearest,  and  selling  in  the  cheapest 

markets 165 

"  Their  interested  sophistry  has  confounded  the  common  sense  of  man- 
kind"    165 

Their  interest  directly  opposed  to  that  of  the  great  body  of  the  people     .  165 
If  these  assertions  be  true,  the  greater  the  freedom  of  trade,  the  greater  the 

monopoly 165 

"  The  sneaking  arts  of  underling  tradesmen  "  have  made  England  what 

she  is 166 

Absurdity  of  his  tirade 166 

Wholly  ignored  moral  laws  as  the  chief  factors  in  civilization 167 

The  heresies  of  country  gentlemen  taught  them  by  merchants    ....  167 

Smith  incapable  of  conducting  a  scientific  discussion 168 

Wholly  unfitted  for  the  work  he  undertook 168 

His  ignorance  and  want  of  method 169 

Cause  of  his  influence 169 

The  great  obstacle  to  progress  in  the  subjects  upon  wliich  he  wrote     .     .     .  170 

Whatever  vigor  and  originality  he  possessed  wholly  lost  in  his  followers      .  170 

DuGALD  Stewart. 

"  Lectures  on  Political  Economy  " 171 

One  of  the  most  distinguished  disciples  of  Smith 171 

Reduces  Smith's  statements  to  precise  and  logical  terms 171 

Agrees  with  him  as  to  the  invention  of  money,  but  denies  value  to  be  a 

useful  attribute  of  it 171 

Were  England  insulated,  her  currency  might  as  well  be  paper  as  coin      .  172 

Value  complicates  the  theory  of  money 172 

Stewart,  in  denying  all  value  to  money,  more  logical  than  Smith     ....  172 
Absurdity  of    his  conclusion  drawn  from  an  assumed  insulation  of  Eng- 
land       174 

His  argument  puerile  to  the  last  degree 175 

Divisibility  the  attribute  fitting  gold  and  silver  to  serve  as  money   .     .     .  176 

Coins  render  ideas  of  value  more  precise  than  mathematical  statements  .  176 

If  value  be  no  attribute  of  money,  then  divisibility  is  of  no  importance  .     .  177 

Rapidity  of  circulation 178 

Illustration :  money  employed  at  the  siege  of  Tournay 178 

Absurdity  of  the  illustration 178 


TABLE   OF   CONTENTS.  Xvii 

The  value  of  money  is  in  ratio  to  the  rapidity  of  its  circulation  ....  180 
Money  possesses  no  more  activity  than  any  otiier  kind  of  property  .  .  .  180 
Stewart  a  striking  example  of  the  weakness  and  folly  of  the  Schoolmen      .     181 


Bank  of  England  —  The  Bullion  Report,  1810. 


^ 


Suspension  of  the  Bank  of  England 182 

Historical  sketch  of  the  Bank 183 

Its  organization  in  1694 183 

Its  nature  and  functions 183 

Act  of  1708  making  it  the  manager  and  regulator  of  the  currency  ....  184 

Authorized  to  issue  notes  to  any  amount 184 

No  other  association  having  more  than  six  members  to  issue  notes      .     .     .  185 

Beneficent  influence  of  the  Bank 185 

The  foundation  of  England's  commercial  and  manufacturing  supremacy      .  185 

Sketch  of  early  banking  in  England 186 

Private  and  country  Banks 186 

Issue  of  notes  a  right  at  common  law 187 

Number  of  country  and  private  Banks  in  operation  from  1809  to  1832,  in- 
clusive (note) 189 

Extent  of  their  operations  (note) 189 

Operations  of  the  Bank  of  England  from  1814  to  1832,  inclusive  (note)   .     .  190 
Amount  of  commercial  bills  under  discount  at  the  Bank,  from  1795  to  1813, 

inclusive  (note) 190 

Forbidden  by  its  charter  to  make  loans  to  government 191 

Loans  made  in  violation  of  this  law 191 

Parliamentary  authority  sought  for  such  loans 192 

Mr.  Pitt  secures  such  authority,  but  without  limit  as  to  amount 192 

Controls  the  whole  monetary  power  of  the  kingdom 192 

The  tremendous  struggle  in  which  he  was  engaged 192 

Financial  condition  of  England  at  the  time 192 

The  necessities  of  JNIr.  Pitt  impair  the  ability  of  the  Bank  to  loan  to  mer- 
chants        192 

Great  distress  the  result 192 

The  Bank  remonstrates 192 

Mr.  Pitt  promises  compliance 193 

Means  of  the  Bank  steadily  reduced 193 

Mr.  Pitt's  operations  from  1794  to  1797 194 

The   bullion   of  the   Bank,  on   the  21st  of  February,   1797,   reduced  to 

£1,272,000 196 

It  appeals  to  the  government 196 

Forbidden  on  February  25,  1797,  to  continue  to  pay  specie 196 

Provisions  of  the  Act  of  Restriction 197 

Rapid  recovery  of  the  Bank  after  suspension 197 

Signifies,  in  1799,  its  willingness  to  resume  payment 198 

Act  of  Restriction  continued  by  the  government 198 

Bank-notes  remain  at  the  par  of  gold  till  June,  1800 198 

Statement  showing  the  value  of  gold  from  1797  to  1821,  inclusive  (note)      .  199 

The  high  premium  on  gold  in  1809  causes  great  alarm 199 

Committee  of  the  House  of  Commons  to  inquire  into  its  causes      ....  199 

Report  of  the  Committee 200 

When  the  Bank  was  upon  a  specie  basis,  it  regulated  its  issues  by  the 

price  of  gold  and  the  state  of  the  exchanges 200 

b 


XVlll  TABLE   OF   CONTEXTS. 

If  at  any  time  the  proper  limit  was  incautiously  exceeded,  the  excess 

returned  for  coin 200 

The  suspension   of   specie  payments  exempted  the   Bank    from    such 

clieck 201 

The  assumption  of  the  Bank,  that  there  could  be  no  excess  of  issue  so 
long  as  it  was  made  in  the  discount  of  short  bills  representing  real 

transactions,  denied •   .     201 

Not  the  excess  alone,  but  all  the  issues  of  the  Bank  speedily  return  for 

redemption 202 

The  excess  acts  upon  the  exchanges  only  through  its  effects 202 

Mode  in  which  it  does  act  upon  them 202 

So  long  as  specie  payments  are  maintained,  no  difference  in  value  between 

the  notes  of  the  Banks  and  gold 202 

The  Committee  simply  follow  Smith  in  making  the  question  of  currency  one 

of  quantity,  not  of  quality 202 

Number  of  days  during  which  the  bank-notes  remain  in  circulation  (note)    .    203 
Years  might  elapse  before  excess  of  issue  would  be  felt  in  the  exchanges     .     203 

The  issues  of  the  Bank,  properly  made,  never  in  excess 203 

To  regulate  issues,  after  suspension,  by  reference  to  exchanges,  would  be  to 

make  none  whatever 204 

The  proposition  of  the  Committee  an  absurdity  on  its  face 204 

During  suspension,  the  bills  of  the  Bank  could  be  paid  only  in  its  own 

notes 204 

The  requirement  of  the  Committee  would  have  left  the  country  wholly 

without  a  currency 204 

The  rule  acted  upon  by  the  Bank  vindicated  by  the  result 204 

Adopted  the  only  possible  course  open  to  it 204 

Gave  the  country,  for  a  considerable  time,  a  symbolic  currency  equal  to  its 

wants,  and  of  the  value  of  com 204 

Saved  it  from  ruin 204 

Error  of  the  Bank  in  not  seeing  that  suspension  removed  the  real  check  to 

overissues 205 

After  suspension  its  reserves  its  own  notes 205 

Great  wisdom  and  ability  with  which  it  was  managed 205 

Ignorance,  and  narrow  scope  of  inquiry,  of  the  Committee 205 

Economists  never  able  to  master  tlie  reason  why  tlie  Bank  recovered   so 

speedily  (note) 206 

Distinction  between  "  an  advance  of  capital  to  merchants,  and  an  addition 

of  currency  to  the  general  mass  of  circulation  " 207 

No  limit  to  the  former  but  the  inability  to  find  good  borrowers     ....     207 
When  the  advances  become  circulation,  the  general  mass  of  currency 

inflated,  and  diminished  in  value 207 

The   amount  of  such  currency  permanently   outstanding  increases   in 

ratio  to  the  loans  tliat  are  made 208 

Notes  representing  capital  the  same  in  character  till  they  are  taken  in     .     .     208 
All  issued  fall  alike  into  the  channels  of  circulation,  and  all  alike  return  to 

the  Bank  for  redemption 208 

Assumptions  of  the  Committee  wholly  groundless 208 

The  currency  of  a  country  bears  no  fixed  proportion  to  the  quantity  of  com- 
modities    209 

Its  effectiveness  depends  upon  the  quickness  of  its  circulation     ....     209 
Contrivances  by  which  the  same  quantity  may  be  made  to  do  an  increased 

amount  of  work 209 


TABLE   OF   CONTEXTS.  XIX 

The  currency  inflated,  and  the  remedy  convertibility 209 

Money  no  more  active  than  other  kinds  of  capital 210 

If  tlie  assumption  of  the  Committee  be  correct,  then  money  is  not  capital    .  211 

No  meaning  can  be  attached  to  the  phrase  "  rapidity  of  circulation  "...  211 

Quantity  of  monej'  always  in  ratio  to  the  exchanges 211 

No  difference  in  principle  between  bank-notes  and  other  instruments  of  ex- 

cliange 211 

Resolutions  accompanying  the  report  of  the  Committee  rejected     ....  212 

Adoption  of  the  counter  resolutions  of  Mr.  Vansittart 212 

Lord  Stanhope's  bill 212 

High  price  of  gold  due  to  excess  of  issues  by  the  Bank 213 

No  reduction  in  their  amount  would  have  increased  their  price,  unless  it  had 

increased  their  value 213 

The  great  question,  the  proper  manner  of  issue,  never  considered  by  the 

Committee 213 

The  report  failed  to  establish  a  single  principle  in  monetary  science    .     .     .  214 

Placed  on  still  firmer  foundations  the  greatest  of  all  its  errors 214 

Hestit  Thokston. 

"  An  Inquiry  into  the  Nature  and  Effect  of  the  Public  Credit  of  Great  Brit- 
ain," 1802    • 214 

No  distinction  between  business  and  fictitious  paper  as  the  basis  of  cur- 
rency         215 

Difference  between  real  and  fictitious  bills  shown  by  the  different  effects  of 

the  currencies  based  upon  them 215 

Lord  King  (note) 215 

"  Thoughts  on  the  Restriction  of  Specie  Payments  by  the  Bank  of  Eng- 
land," 1803  (note) '...'. 215 

Of  little  value  butin  keeping  alive  the  opposition  to  the  Restriction  Act  (note)  215 

"William  Huskissox. 

"  Question  concerning  the  Depreciation  of  our  Currency  :  "  a  vindication  of 

the  Bullion  Report 216 

Distinction  between  metallic  and  paper  money 216 

Tlte  latter  circulates  not  by  its  value,  but  by  confidence  or  authority  .     .  216 

Value  no  more  a  necessary  attribute  of  money  than  of  a  foot-rule   .     .     .  216 

Neither  confidence  nor  authority  can  create  values 217 

A  foot-rule  not,   like  money,  receivable  in  exchange  for    the  articles  it 

measures 217 

If  paper  money  be  depreciated,  the  metallic  money  in  circulation  will  also 

be  depreciated  in  reference  to  bullion 218 

A  repetition  of  Lowndes'  argument  refuted  by  Locke 219 

Singular  confusion  into  which  Huskisson  fell  in  reference  to  money     .     .     .  220 

David  Ricakdo. 

"  The  Principles  of  Political  Economy  and  Taxation,"  1817 221 

Ricardo  the  central  figure  of  tlie  new  school  of  Economists,  as  Smith  of  the 

old 221 

As  wanting  in  ideas  as  Smith  in  method  and  in  knowledge  of  afiairs  .  .  .  221 
Pushes  Smith's  doctrine,  that  value  is  not  a  necessary  attribute  of  money, 

to  its  logical  result 221 

Value  not  an  attribute  of  money        222 


XX  TABLE   OF   CONTENTS. 

It  circulates  by  virtue  of  the  insignia  of  government 222 

Convertibility  only  useful  in  preventing  an  excess 222 

The  insignia  of  government  cannot  create  values 223 

Convertibility  a  very  inadequate  test  of  the  propriety  of  issue 224 

Government  should  be  the  issuer  of  currency 226 

The  saving  effected  thereby 226 

Government  greatly  the  loser  by  issuing  money 227 

Ricardo's  doctrines  of  Free-Trade 228 

Prices  controlled  by  the  least  favored,  not  by  the  most  favored,  producers  228 

His  assumptions  wholly  opposed  to  the  fact 229 

His  doctrine  of  rent  the  sequence  of  that  of  prices 229 

His  plan  for  an  economical  and  secure  currency 230 

To  be  made  equal  to  coin  by  a  provision  of  bullion 230 

No  bullion  to  be  used,  from  the  inconvenience  of  reaching  it 231 

Puerility  of  his  scheme 232 

Eminently  practical  as  a  man  of  affairs 232 

Discharged  of  all  sense  the  moment  he  took  up  his  pen 232 

The  Bank  of  England. 

Price  of  bullion  from  1813  to  1819 233 

Act  of  Parliament  of  1819  requiring  the  Bank  to  resume 234 

Provision  made  for  resumption 234 

The  Bank  resumes  May  1,  1821       235 

Its  condition,  1817-25 235 

Great  inflation  of  the  currency,  and  rise  of  prices 236 

Commercial  crisis  of  1826 236 

List  of  speculative  enterprises  brought  upon  the  money  market  (note)     •     .  237 

Extent  of  the  speculative  mania       238 

Run  upon  the  Bank 238 

Saved  from  suspension  by  the  discovery  of  a  package  of  notes 238 

Action  of  the  government       238 

Communication  addressed  by  Lord  Liverpool  to  the  Bank 238 

Evil  of  an  excessive  issue  of  paper  money 239 

The  remedy  an  improvement  of  the  country  paper 239 

Evil  not  caused  by  small  notes 239 

The  Bank  of  England  to  give  up  its  exclusive  privileges,  and  establish 

branch  Banks 240 

Country  Banks  to  be  allowed  to  increase  the  number  of  their  partners      .  240 

Lord  Liverpool's  plan  adopted 241 

Committee  of  the  House  of  1832  upon  the  extension  of  the  Bank  Charter  .  242 

Matters  to  which  its  attention  was  directed 242 

Whether  there  should  be  one  or  several  issuers  of  the  currency    ....  243 

If  only  one,  should  that  be  the  Bank  of  England  ? 243 

What  checks  to  be  provided  to  secure  a  proper  management  of  Banks 

of  Issue 243 

No  conclusions  reported  by  the  Committee 243 

Its  labors  consisted  chiefly  in  the  examination  of  experts,  — 

Mr.  Loyd  (Lord  Overstone) 243 

Mr.  Ward 244 

Mr.  Norman 244 

Mr.  Tooke 245 

Mr.  Grote 245 

Mr.  Glyn 246 

Mr.  Gurney 246 


TABLE   OF    CONTEXTS.  Xxi 

Testimonj-  of  tlie  experts  opposed  to  every  principle  on  which  currency  is 

based 247 

Involved  the  subject  in  still  greater  obscurity  and  error 248 

Evidence  of  the  representatives  of  joint-stock  Banks 252 

These  Banks  successful!}'  compete  with  that  of  England 252 

The  latter  a  great  disturbing  element  in  financial  affairs 253* 

Its  action  corrected  and  neutralized  by  that  of  the  joint-stock  Banks  .     .     .  254 

The  latter  the  great  issuers  of  the  currency 254 

Management  of  tlie  Bank 254 

Evidence  of  J.  Horsley  Palmer,  President,  and  other  Directors 254 

Its  issues  not  based  upon  bills,  but  upon  government  securities     ....  254 

Discount  of  bills  left  to  Banks  and  bankers 254 

Rule    of  the  Bank  to  hold  coin  and   bullion  equalling  in  amount  one- 
third  its  liabilities 255 

The  currency  then  even  or  full 255 

Starting  with  this  amount,  all  fluctuations  left  to  take  care  of  themselves  256 

An  outflow  of  bullion  to  be  left  to  work  its  own  cure 256 

If  excessive,  the  Bank  might  regulate   its   issues   by  reference    to  the 

exchanges 256 

Condition  of  the  Bank.  Feb.  29,  1832  (note) 257 

Vicious  system  of  management 257 

Government  securities  not  the  proper  basis  of  loans 258 

Cannot  be  made  available  in  case  of  panic 258 

If  its  assets  were  in  bills,  their  payment  would  return  its  notes  without 

effort  on  its  part 259 

State  of  the  exchanges  an  inadequate  rule  for  its  action 259 

The  action  of  the  Bank  should  prevent  adverse  exchanges 260 

The  rule  adopted  by  the  Bank  fails  to  work 260 

Gradual  reduction  of  its  reserves 260 

Mr.  Palmer  undertakes  to  account  for  the  failure  of  the  rule 261 

"  The  Causes  and  Consequences  of  the  Pressure  in  the  Money  Market," 

1837 261 

Increase  of  joint-stock  Banks * 261 

Their  excessive  issues  create  a  demand  for  coin 261 

The  Bank  compelled  to  supply  the  demand 264 

It  did  not  reduce  its  issues,  for  the  reason  that  the  demand  was  domestic, 

not  foreign 264 

When  the  exchanges  were  even  or  favorable,  it  supplied  all  the  currency 

wanted 264 

Hence  the  condition  in  which  it  was  placed 266 

Existence  of  joint-stock  banks  incompatible  with  that  of  the  Bank  of 

England 267 

Inadequacy  of  his  explanation 267 

The  Bank  governed  by  no  rules 267 

Its  reserves  to  have  reference  to  domestic  as  well  as  to  foreign  trade  .     .     .  269 

Its  issues  the  cause  of  an  unfavorable  state  of  the  exchanges 270 

Made  when  they  are  even  or  favorable 270 

A  large  amount  of  gold  in  the  Bank  evidence  of  a  depressed  condition  of 

production  and  trade 271 

Never  to  be  made  the  basis  of  loans 271 

Extraordinary  demands  upon  the  Bank  in  1837 272 

Its  efforts  to  meet  them  only  serve  to  postpone  the  crisis 272 

Reply  of  Mr.  Loyd  (Lord  Overstone)  to  Mr.  Palmer 274 


Xxii  TABLE   OF   CONTENTS. 

"Reflections  Suggested  by  a  Perusal  of  the  Pamphlet  of  Mr.  J.  Horsley 

Pahner,"  1837 274 

"  The  Bank  acts  in  two  capacities :  as  a  manager  of  the  circulation,  and 
as  a  body  performing  the  ordinary  functions  of  a  banking  con- 
cern"    274 

These  two  functions  wholly  distinct 275 

As  a  manager  of  the  currency,  the  rule  stated  by  Mr.  Palmer  perfectly 

correct -"'" 

Wholly  impracticable  when  applied  to  the  regulation  of  its  conduct  as  a 

banking  concern 275 

As  an  issuer  of  currency,  it  can  keep  the  amount  of  its  securities  uniform  275 

Cannot,  as  a  banking  concern 275 

The  amount  of  its  circulation  to  be  represented  by  a  fixed  amount  of 

securities,  and  by  the  bullion  it  holds 2.5 

By  such  means  only  can  a  currency  be  obtained  varying  in  amount  as  it 

would  have  varied  liad  it  been  metallic 276 

The  Bank  to  be  separated  into  two  departments 276 

It  now  unites  two  wholly  incompatible  functions 277 

It  leaves  the  issue  of  currency  to  partita  incompetent  to  their  duties     .     .  277 

Disturbing  influence  of  joint- stock  Banks 277 

Distinction  between  Banks  of  issue  and  Banks  of  deposit 277 

The  process  of  inflation  and  contraction 277 

Eemedy,  the  strengthening  of  the  monopoly  of  the  central  issuer       .     .     .  278 
Issue  of  circulation  to  be  subject  to  the   supervision  of  a  Committee 

appointed  by  government 279 

Partial  recovery  of  the  Bank  in  1837 279 

Drain  of  coin  in  1838 279 

Reserves  reduced,  31st  of  August,  1839,  to  £2,424,000 279 

The  Bank  applies  to  the  Bank  of  France  for  aid 279 

Causes  of  the  disasters  of  1839 280 

Committee  of  the  House  appointed  to  consider  the  subject  of  Banks  of  Issue  281 

Mr.  Loj^d  (Lord  Overstone)  before  the  Committee 281 

Distinction  between  notes  and  deposits 281 

Notes  money,  deposits  not 282 

Money,  coin  and  notes  of  Banks 282 

The  value  of  bank-notes  regulated  by  precisely  the  same  laws  which  regu- 
late the  value  of  coin 282 

The  former  the  common  medium  of  exchange,  in  all  transactions,  at  all 

times,  and  in  all  places,  and  that  too  in  endless  succession      .     .     .  282 

Deposits  possess  no  such  attributes 282 

Deposits,  business  worked  ;  notes,  the  means  by  which  they  are  worked  .  283 

Lord  Overstone  the  real  author  of  the  act  of  1844 283 

Summary  of  his  argument 285 

His  ideas  of  money  wholly  borrowed  from  Adam  Smith 286 

No  dilTerence  in  principle  between  the  several  forms  of  paper  money  .     .     .  288 

Had  no  conception  of  the  nature  of  symbolic  money 288 

The  incoherency  and  absurdity  of  his  statements  and  illustrations  ....  289 

The  extension  of  ^he  Charter  of  the  Bank 289 

Sir  Robert  Peel  at  the  head  of  the  government 289 

His  argument  on  bringing  in  the  bill 289 

A  natural  distinction  between  the  notes  and  deposits  of  Banks     ....  290 

Notes  aflect  the  exchanges,  deposits  do  not 290 

Currencies  of  Ireland  and  Scotland 290 


TABLE   OF   CONTENTS.  XXlll 

Notes  and  deposits  to  be  dealt  with  upon  different  principles 291 

His  argument  a  refinement  upon  Lord  Overstone's  distinction 291 

Example  of  the  United  States  against  plurality  of  issue 292 

Supported  by  Sir  Charles  Wood  (Lord  Halifax) 292 

By  Mr.  Goulburn,  Chancellor  of  the  Exchequer 292 

Their  ignorance  of  banking  systems  of  the  United  States 293 

An  account  of  these  systems 293 

The  "  Suffolk  system  "  of  New  England 294 

Provisions  of  the  Act  of  1844 296 

Its  effect  to  create  two  Banks  of  issue 298 

The  issues  of  one  legal-tender,  receivable  for  the  revenues,  and  supported  by 

all  the  specie  of  the  Bank 298 

Those  of  the  other  have  no  support  but  its  bills 299 

No  considerable  amount  of  reserves  needed  by  the  former 299 

To  be  held  by  the  department  whose  issues  have  no  extraordinary  support  299 

No  immediate  effect  produced  by  the  Act 300 

Rise  and  progress  of  the  railways  of  tlie  kingdom 300 

Vast  sums  invested  in  them  in  1845  and  1846 300 

Failure  of  the  potato  crop  in  Ireland 300 

Financial  operations  of  the  country  in  1845-46 300 

Drain  upon  the  Bank  in  1846 301 

Becomes  excessive  in  1847 301 

Suspension  of  the  Act  of  1844 301 

The  panic  confined  to  the  issues  of  the  banking  department 302 

Parliament  called  together 302 

Speech  of  the  Chancellor  of  the  Exchequer 302 

During  the  panic,  the  Bank  discounted  all  bills  offered 303 

Restoration  of  affairs  upon  the  suspension  of  the  Act 303 

Speech  of  Sir  Robert  Peel •  ....  304 

The  Act  of  1844  failed  to  prevent  a  financial  crisis 304 

Secured  the  convertibility  of  the  notes 305 

The  Bank  held  responsible  for  the  suspensions  of  1847,  1857,  and  1866    .     .  305 

The  public,  not  itself,  to  determine  the  amount  of  its  issues 305 

Has  no  discretion  but  to  discount  all  bills  coming  within  its  rules    ....  305 

The  advantages  assumed  for  the  Act  wholly  imaginary 306 

Committees  of  Parhament  of  1848 307 

Lord  Overstone  again  examined 307 

The  Act  "  has  verified  every  principle  upon  which  it  was  established  "    .  307 

"It  failed,  however,  from  two  accidents." 308 

Committees  of  Parliament  upon  the  Bank 308 

Immense  extent,  and  futility  of  their  labors 308 

Absurdity  of  forbidding  depositors  to  be  paid  in  kind 309 

Note  issue  a  monopoly  in  England 310 

Folly  of  the  restriction 310 

Suspension  of  the  Act  approved  by  the  officers  of  the  Bank 311 

Cause  of  the  failure  of  the  Bank 311 

Thomas  Tooke. 

Before  the  Committee  of  1840 313 

The  amount  of  circulating  medium  the  effect,  not  the  cause,  of  inflation 

of  prices 314 

A  convertible  currency  cannot  be  inflated 314 

An  inconvertible  currency,  not  issued  in  excess,  cannot 314 


xxiv  TABLE  OF  CONTENTS. 

Money  has  two  functions, —  one  as  an  instrument  of  exchange,  the  other 

as  the  subject  of  contracts  for  future  payments     .....'..  315 

Value  essential  only  in  the  latter 316 

Tooke  never  mastered  a  single  principle  in  monetary  science 316 

His  poverty  in  ideas  and  style 317 

James  E.  McCulloch. 

Epitomizes  all  the  speculations  and  conclusions  of  the  Economists      .     .     .  318 

Gold  can  be  raised  to  any  pitch  of  value,  by  limiting  its  quantity   .     .     .  318 

Debased  coins  may  be  made  to  circulate  at  their  nominal  value  ....  319 

The  most  valueless  substances  may  be  made  to  circulate  as  money     .     .  319 

Impossible  to  control  the  movements  of  coin 320 

To  raise  its  value  in  reference  to  itself 321 

Or  to  cause  valueless  articles  to  circulate 322 

The  solvency  of  issuers  has  no  influence  over  the  value  of  paper  money  .  322 
It  circulates  for  the  reason  that  it  is  legal  tender,  and  for  the  reason  that 

a  circulating  medium  is  indispensable 322 

How  an  inconvertible  currency  may  be  maintained  at  the  value  of  coin  .  323 

The  price  of  paper  money  measured  by  its  value 323 

High  cost  of  gold  and  silver  an  objection  to  their  use  as  money  ....  324 

A  cheaper  money  should  be  "  fabricated  " 325 

Paper  the  most  eligible  material  therefor 325 

The  high  cost  of  gold  and  silver  the  reason  of  their  use 325 

Every  one  seeks  to  convert  that  which  he  has  to  sell  into  higher  forms  of 

value 325 

The  whole  effort  of  nature  in  the  same  direction 325 

The  principles  of  the  Economists  incompatible  with  the  existence  of  society  325 

Supports  the  Act  of  1844 326 

Opposes  plurality  of  issue  from  the  example  of  the  United  States   .     .     .  326 

His  incredible  ignorance  and  assumption 326 

Scotch  Economists  and  metaphysicians  wanting  in  the  reasoning  faculty      .  327 

The  cause 328 

Practical  sense  of  the  nation 329 

Close  resemblance  to  the  Puritan  emigrants  to  the  United  States    ....  329 

John  Stuart  Mill. 

"  Political  Economy " .^    .....  330 

The  text-book  in  most  common  use 330 

Its  author  the  great  light  in  modem  economy 330 

Money  becomes  such  from  habit 330 

The  habit  begets  the  illusion  that  money  is  wealth  in  a  peculiar  sense  .     .  330 

It  is  not  money  with  which  things  are  purchased 330 

No  one's  income  derived  from  the  precious  metals 330 

The  farmer  converts  his  products  into  monej*,  in  order  to  "leave  the 

laborer  more  leisure  for  work,  and  the  landlord  for  being  idle  "  .     .  330 
"  No  more  insignificant  thing,  intrinsically,  in  the  economy  of  society 

than  money 331 

"  It  is  a  machine  for  doing  quickly  and  commodiously  what  could  be 

done,  though  less  quickly  and  commodiously,  without  it."  ....  331 
Mill's  description  of  the  nature  and  functions  of  money  borrowed  from 

Adam  Smith 331 

The  use  of  gold  and  silver  as  money  proves  them  to  be  capital  in  a  peculiar 

sense * 831 


TABLE   OF   CONTEXTS.  XXV 

When  one  lends,  the  money  is  not  the  capital  loaned 332 

The  fallacy  that  the  lending  of  money  is  the  lending  of  capital   ....  332 
"Money,  the  medium  of  exchange,  not  the  capital  that  is  passed  from 

hand  to  hand  through  that  medium  " 332 

Increase  of  the  gold  and  silver  of  a  community,  no  increase  of  its  capital  S32 

Money,  when  used  as  such,  always  used  as  capital 333 

The  lending  of  money  the  lending  of  capital 333 

The  capital  of  a  community'  in  ratio  to  its  money 333 

The  value  of  money  inversely  as  its  quantity  multiplied  by  the  rapidity 

of  its  circulation 334 

If  payments  be  increased,  money  must  be  increased,  or  the  rapidity  of 

circulation  of  that  in  use  must  be  increased 335 

Otherwise  prices  must  fall 335 

Money  no  greater  rapidity  of  circulation  than  other  kinds  of  merchandise  .  337 

"  Neither  bank-notes,  bills,  nor  checks  act  upon  prices  " 837 

"  Credit,  not  the  form  and  mode  in  which  it  is  given,  the  operating 

cause" 393 

Credits  cannot  act  upon  prices,  unless  they  take  a  form  which  can  be  con- 
verted into  money 339 

Inconvertible  currencies 341 

The  material  of  a  currency  a  matter  of  convention 341 

The  objection  to  the  use  of  worthless  substances  as  currency,  the  difH- 

culty  in  regulating  their  amount 341 

What  determines  the  value  of  an  inconvertible  currency  1 341 

Value  no  necessary  attribute 341 

Will  be  maintained  at  the  par  of  coin,  if  it  do  not  exceed  the  amount 

of  the  latter  it  has  displaced 342 

Exerts  precisely  the  influence  of  a  convertible  currency,  if  not  issued  in 

excess 342 

Importance  of  uniformity  in  the  amount  of  cm-rency 342 

The  precious  metals  selected  from  the  uniformity  of  their  supply    .     .     .  342 
Inconvertible  money  in  excess  when  not  exchangeable  for  equal  nominal 

amounts  of  coin 343 

The  difHculty  of  regulating  its  quantity  the  only,  but  a  sufficient,  reason 

against  its  use 343 

No  currency  not  presently  due  equal  in  value  to  the  capital  it  represents 

in  hand 344 

The  difference  between  convertible  and  inconvertible  currencies    ....  344 

The  material  and  value  of  money  do  not  depend  upon  convention  ....  345 

Inconvertible  paper  money  equivalent  to  the  creation  of  capital  ....  346 

It  liberates  from  use  a  corresponding  amount  of  coin 347 

Illustration  of  this  argument 347 

Fallacy  of  such  assumptions 347 

A  convertible  currency  cannot  inflate  prices 350 

Convertible  currencies  often  inflate  prices  enormously 351 

Agrees  with  Tooke,  that  paper  money  does  not  act  upon  prices   ....  352 

Opposed  to  plurality  of  issue 3-54 

Attaches  very  little  importance  to  notes  of  Banks 354 

They  have  the  power,  however,  of  completely  superseding  metallic  money  354 

The  issue  of  money  should  be  for  the  benefit  of  the  public 355 

How  government  might  issue  it 355 

Mr.  Mill  a  most  striking  example  of  unwarranted  assumption  and  imbecility  355 

Eeason  of  his  failure,  and  that  of  his  school  .     •• 355 


XXvi  TABLE   OF   CONTEXTS. 

Their   total  misconception  of  the  principles   of  the  science  of  Political  ^_^ 

Economy „.q 

Morality  a  necessary  condition  of  material  welfare "     '     "  356 

Example  of  the  Hebrew  race "t 

Necessity  of  a  higher  law  than  morality 

This  to  be  found  in  the  teachings  of  Christ ^ 

Christianity  secular  as  it  is  religious ^ 

Importance  of  subjecting  ethnic  religions  to  its  rules ^^' 

Lesson  taught  by  the  history  of  the  Seven  United  Provinces rfo» 

Their  vast  wealth  and  prosperity ,  *    ,".    '     "     '       "^ 

Inquiries  as  to  the  cause,  addressed  by  the  Stadtholder  to  the  leadmg  mer- 
chants of  the  country ^ 

Their  answer 

The  causes  threefold  :  physical,  moral,  and  adventitious *ibU 

These  stated  in  detail ^*^^ 

The  highest  material  welfare  the  result  of  the  highest  moral  conditions   .     .  301 

Where  the  latter  exist,  the  Political  Economist  wholly  superfluous      ...  362 


\ 


H.   D.    rUCLEOD. 

Extracts  from  his  work  on  banking 363 

"  Money  does  not  represent  commodities  at  all,  but  only  debt."    ....  364 

"  Where  there  is  no  debt,  there  is  no  currency." .364 

"Among  all  civilized  nations,  gold  and  silver  bullion  is  the  representative 

of  debt." 365 

"It  would  be  perfectly  possible  to  make  a  yard  of  broadcloth  or  a  Dutch 

cheese  the  representative  of  debt  and  the  measure  of  value."     .     .  365 

The  extravagance  ef  Mr.  Macleod's  assertions  their  own  answer      ....  366 
An  inconvertible  currency  may  be  maintained  at  par,  if  the  quantity  be 

no  greater  than  that  of  a  convertible  one 366 

Issued  in  proper  amounts  so  long  as  it  can  be  converted  into  equal  nom- 
inal amounts  of  coin 367 

James  W.  Gilbaet. 

"  The  Principles  and  Practice  of  Banking  " 368 

A  striking  example  of  success  as  a  banker,  and  entire  ignorance  of  the 

principles  of  money 368 

Examined  before  the  House  Committee  of  1840 368 

"  Bankers  in  issuing  their  notes  make  no  reference  to  the  quantity  of  gold 

in  the  country." 368 

"  The  circulation  of  private  bankers  cannot  be  issued  in  excess."     .     .     .     368 
"  The  country  circulation  under  checks  ;  the  Bank  of  England  circulation 

is  not." 369 

The  notes  of  private  Banks  do  not  affect  the  rates  of  interest  or  the 

exchanges 369 

The  notes  of  the  Bank  of  England  do 369 

The  notes  of  private  Banks  and  the  Bank  of  England  precisely  the  same  in 

kind,  and,  in  ratio  to  their  amounts,  the  same  in  effect 370 

Gold  and  silv  er  to  be  demonetized  in  case  of  a  war,  as  a  means  of  retaining 

them  in  the  country 372 

Fallacy  of  this  assumption 373 

Banking  capital  may  be  raised  by  an  issue  of  notes 374 

In  providing  a  banking  capital,  makes  no  distinction  between  substance  and 

fiction gyg 


TABLE   OF   CONTENTS.  XXVU 


Henry  Fawcett. 

"  Manual  of  Political  Economy  " 375 

Adopts  Adam  Smith's  theories  upon  money 376 

Effect  produced  by  paper  money  upon  prices 376 

The  econoni}'  of  its  use 376 

If  the  number  of  exchanges  increase,  the  amount  of  currency  remaining 

the  same,  prices  will  rise    • 376 

Prices  depend  upon  the  quantity  of  money  in  circulation 377 

If  commodities  increase,  and  money  remain  stationary,  prices  must  fall    .  377 

If  money  increase,  and  commodities  remain  stationary,  prices  will  rise      .  377 

Paper  money  circulates  by  virtue  of  representing  merchandise,  not  coin  .     .  378 

Discharged  by  the  consumption  of  its  constituent 378 

Notes  in  circulation  do  not  displace  coin  from  circulation 379 

The  economy  of  their  use  results  from  their  supplementing  other  modes  of 

distribution 379 

Inadequacy  of  Mr.  Fawcett's  theory  of  the  effect  of  money  upon  prices   .     .  380 

Makes  no  discrimination  between  different  kinds  of  money 380 

Paper  money,  not  symbolic,  raises  prices      ............  381 

That  which  is  symbolic  reduces  them        381 

Advantages  of  a  symbolic  currency 381 

Money  always  to  be  in  ratio  to  the  number  of  exchanges 381 

The  nature  of  credits 381 

A  restatement  of  the  subject 381 

The  credits  that  affect  prices  are  those  that  are  turned  into  money      .     .     .  382 

The  proper  basis  of  issues 382 

Inconvertible  currencies  may  be  maintained  at  par,  if  their  amount  be 

limited  to  the  necessities  for  their  use 383 

Illustration  of  the  case  of  the  United  States  in  the  War  of  the  Rebellion  .  383 

The  value  of  all  currencies  their  price 384 

Only  repeats  the  prevailing  monetary  theories 385 

W.  Stanley  Jevons. 

"  Money  and  the  Mechanism  of  Exchange" 385 

Description  of  the  nature  of  money 385 

Absurdity  of  his  description 386 

The  State  may  issue  the  currency 387 

Fourteen  series  of  methods  for  the  issue  of  paper  money 388 

An  inconvertible  currency  may  be  made  to  circulate  at  par 388 

Legal-tender  paper  money 389 

Issue  of  notes  analogous  to  the  highest  function  of  coinage 390 

Quoted  for  the  purpose  of  illustrating  the  present  condition  of  monetary 

science 391 

Introductory  Lecture  at  the  opening  of  the  University  of  London  for  the 

Session  of  1876-77 391 

Hundredth  anniversary  of  the  publication  of  the  "  Wealth  of  Nations"   .  391 

Discouraging  picture  of  the  condition  of  economic  science 391 

Disgust  in  which  its  teachers  are  held 392 

Breaking  up  of  the  old  orthodox  school  of  Economists 392 

Respect  for  the  names  of  Ricardo  and  Mill  no  longer  able  to  preserve 

unanimity 392 

Chaotic  state  of  the  science       393 

The  new  school 393 


XXViii  TABLE   OF   CONTENTS. 

M.  de  Laveleye ^^^ 

Mr.  Jevons's  address  proof  of  the  extremity  to  which  the  old  school  is 

reduced ^^" 

Political  Economy  a  mathematical  science 397 

"  The  laws  of  supply  and  demand,  and  all  the  phenomena  of  value,  may 

be  investigated  algebraically,  and  illustrated  geometrically."  ...  397 

Effeteness  of  the  English  school -^ 399 

BoNAMT  Price. 

"  Principles  of  Currency  " 399 

"  The  doctrines  of  merchants  and  bankers  have  subdued  the  whole  laud  "  399 

"  Difference  wiiich  separates  the  man  of  science  from  the  man  of  practice  "  399 
"  No  science  has  suffered  so  severely  from  the  hands  of  the  practical  man 

as  Political  Economy  " 399 

"  The  more  he  is  engaged  in  affairs,  the  more  mysterious  his  rules  for 

the  acquisition  of  wealth " 400 

His  method  monopoly 400 

His  teachings  adopted  by  every  civilized  country 400 

Culminated  in  the  famous  Mercantile  Theory 400 

Cause  of  the  decline  of  political  science 400 

The  truths  of  Political  Economy  have  made  no  permanent  lodgement  in 

the  public  mind 401 

The  incredible  absurdity  that  gold  is  wealth 402 

Great  bankers  dominate  men  of  science 403 

Their  metliods  pi-eferred  to  those  of  the  Economists 403 

How  checks  arise,  and  their  nature 404 

How  bank-notes  arise,  and  their  nature 405 

Price  an  illustration  of  what  is  taught  as  Political  Economy 406 

•  Merchants,  in  holding  gold  to  be  capital,  deny  the  fundamental  principles 

of  the  Economists 407 

Hence  the  hatred  felt  toward  them  by  the  latter ■   .     .    .     .  407 

The  incredible  absurdity  of  Price's  statements  and  illustrations 407 

—  ■    .\CoNTiNENTAL  Wkiters.     (note.) 

Jean  Baptiste  Say  (note) 408 

"  Treatise  on  Political  Economy  "  (note) 408 

Chevalier  (note) •    .     .     .     .  408 

Wolowski  (note) 408 

American  Political  Economists. 

Only  repeat  what  they  find  in  the  books 408 

Francis  Bowen. 

"  American  Political  Economy." 409 

Money  a  contrivance  for  diminishing  the  friction  of  exchange       ....  409 

Its  value  dependent  on  rapidity  of  circulation 410 

Reduced  to  a  formula 410 

Reductio  ad  absurdum  from  his  illustration 411 

Money  only  a  hypothetical  or  abstract  medium  of  exchange 413 

Difference  between  bank  currency  and  inconvertible  paper 414 

The  latter  liable  to  be  issued  in  excess  ;  the  former  not 414 

His  work  only  a  restatement  of  Mill  and  McCuUoch 415 

Mischievous  effect  of  such  teachings 416 


TABLE   OF   CONTENTS.  Xxix 

Professorships  of  Political  Economy   should   be   suppressed,  or  put   into 

commission 415 

Manner  in  which  it  is  still  taught  in  Harvard  University  (note) 415 

WiLLiAJi  G.  Sumner. 

"History  of  American  Currency  " 416 

The  Report  of  the  Bullion  Committee  solves  the  whole  subject  of  money  .  416 

No  condition  expressed  by  the  term  "  Balance  of  Trade  " 416 

"Exploded  by  Quesnay  a  century  ago,    and  gibbeted  in   the  Bullion 

Report " 416 

"  The  fallacy  is  in  the  word  '  balance '" 417 

"  If  it  means  equilibrium,  it  regulates  itself" 417 

"  If  it  means  remainder,  it  is  a  mere  myth  " 417 

The  doctrines  of  the  Report 417 

The  value  of  an  inconvertible  currency  depends  upon  its  amount     .     .     .  417 

When  gold  is  at  a  premium,  paper  is  redundant 417 

Balance  of  trade  a  veritable  fact 420 

His  "  inferior "  currency 421 

Only  repeats  the  stale  theories  and  illustrations  of  the  Economists  ....  421 

A.  R.  Peeet. 

"  Elements  of  Political  Economy  " 422 

Extracts  from  his  works 422 

David  A.  Wells,    (note.) 

"  The  Cremation  Theory  of  Specie  Resumption,"  1875  (note) 424 

An  example  of  the  manner  in  which  the  subject  is  popularly  treated  .     .     .  424 

Objects  of  the  second  part  of  this  work 425 

The  science  in  its  present  form  the  work  of  Aristotle 426 

Discussed  from  his  time  to  our  own  after  the  manner  of  the  Schoolmen      .  426 

Most  striking  example  in  history  of  the  permanence  of  erroneous  opinions  .  426 
The  whole  question  turns  on  whether  value  be  an  essential   attribute  of 

money 426 

That  conceded,  it  becomes  a  question  in  the  exact  sciences 426 

The  appeal  to  the  empirical  has  fully  sustained  the  conclusions  of  induc- 
tion       427 


CURRENCY  AND  BANKING  IN  THE  UNITED   STATES. 


Character  of  the  revolutionary  government 429 

Did  not  possess  the  power  of  taxation 4^29 

An  issue  of  notes  the  obvious  mode  for  providing  for  the  prosecution  of  the 

war 429 

Such  currencies  previously  resorted  to  by  the  States 429 

Their  issue  always  popular 429 

First  Continental  Congress,  May  10,  1775 429 

The  New  York  delegates  suggest  the  issue  of  notes 429 


XXX  TABLE   OF   CONTENTS. 

First  issue  of  .«!3,000,000,  June  22cl,  1775 430 

Form  of  notes 4"^ 

Continued  Issues 431 

Apportioned  among  the  States  (note) 431 

Early  decline  in  their  value 431 

Efforts  to  sustain  their  price 4b2 

Further  issues  and  increased  decline 434 

Attempt  to  arrest  the  decline 435 

Robert  Morris  (note) 435 

Order  of  Congfress  that  the  notes  pass  at  their  nominal  value 436 

Washington  invested  with  dictatorial  powers 437 

Great  strait  to  which  the  cause  of  the  patriots  was  reduced 437 

Committees  of  safety 437 

Futility  of  their  efforts 438 

Amount  of  notes  issued  up  to  the  close  of  1776 438 

Tariffs  of  prices 438 

The  notes  counterfeited 439 

Mission  of  Franklin  to  France 439 

French  loans 439 

Capture  of  Burgoyne 439 

Alliance  with  France,  Feb.  6th,  1778 439 

Further  issues  of  notes 439 

Depressed  condition  of  the  country 441 

Continued  decline  of  the  notes 441 

Addresses  of  Congress  to  the  people 441 

Varying  fortunes  of  the  war 442 

Further  issues,  and  decline  in  value  of  the  notes 442 

Committee  of  Congress  on  Finance  appointed 442 

Recommends  a  repeal  of  the  law  making  the  notes  the  equivalent  of  gold  .  443 

Rapid  decline  in  their  value 443 

Demoralizing  effect  of  their  use 443 

How  Washington  regarded  them 443 

Apparent  imbecility  of  the  Revolutionary  Government 444 

Antagonistic  elements  in  the  nation 444 

Massachusetts  and  Virginia 445 

The  notes  still  counterfeited 446 

The  issues  of  May  22,  1777,  and  April  11,  1778,  called  in 446 

Consequent  suffering 446 

Hucksters  and  forestallers 4-47 

Monopolies  of  money  and  merchandise  always  the  effect  of  a  legal-tender 

currency 448 

Notes  issued  in  1778 448 

Wretched  condition  of  the  nation 449 

Mutiny  in  the  army 450 

Incompetency  and  imbecility  of  the  enemy 450 

Subjection  of  the  colonies  impossible 460 

Unsuccessful  attempt  by  Congress  to  call  in  its  notes,  Jan.  1,  1779,  followed 

by  new  issues 45I 

Popular  discontent 45I 

Committees  of  safety  to  regulate  prices 451 

Attempts  to  prevent  the  circulation  of  coin 463 

Their  utter  failure 453 

Continued  issues  and  decline  of  notes 464 


TABLE   OF   CONTENTS.  XXxi 

Address  of  Congress  to  tlie  people 454 

Attempt  to  demonstrate  the  ability  of  the  country  to  discharge  all  its  obli- 
gations        454 

Amount  of  »the  public  debt  (note) '.....  455 

Statement  of  expenditures  for  1778  (note) 455 

Washington  declines  to  receive  the  notes 455 

Letter  to  the  President  of  Congress 456 

Excessive  depreciation  of  the  notes  at  the  close  of  1779 457 

Statement  of  the  amount  issued  (note) 457 

Unsuccessful  attempt  by  Congress  to  call  them  in 457 

Proposal  for  a  reissue  at  the  rate  of  1  to  20  of  the  old 457 

The  new  no  better  received  than  the  old 457 

Josiah  Quincy  (note) 458 

Pelatiah  Webster  (note) 458 

Value  of  the  notes  falls  to  500  to  1  of  specie 459 

Cessation  of  issue 45'J 

Demonetization  «f  the  notes 459 

Reappearance  of  specie 459 

Mischievous  effect  of  the  government  currency 460 

Testimony  of  contemporaneous  writers 460 

French  loan 461 

Appointment  of  Robert  Morris  as  Financier- General 461 

Association  of  the  citizens  of  Philadelphia,  June  17,  1780,  to  aid  the  opera- 
tions of  the  government 462 

They  organize  a  "Bank" 462 

Measure  approved  by  Congress 462 

Gouverneur  Morris  and  Hamilton  in  reference  to  the  Bank  (note)   ....  463 

Bank  of  North  America  incorporated,  Dec.  31,  1781 464 

First  adequate  attempt  to  issue  a  symbolic  currency  in  America     ....  464 

Valuable  services  rendered  to  the  government 465 

Establishment  of  peace 465 

Disorganized  condition  of  the  country 465 

Local  jealousies  and  rivalries 466 

General  Washington  in  reference  to  them 466 

Adoption  of  the  Constitution 467 

Formation  of  the  Federal  Government 467 

Alexander  Hamilton  Secretary  of  the  Treasury 468 

Measures  proposed 468 

1st.  Payment  of  the  debts  contracted  during  the  late  war 468 

2d.  Provision  for  the   charges   of  the  government  by  imposts  on  foreign 

merchandise 469 

3d.  Provision  of  a  symbolic  currency  by  means  of  a  Bank 469 

Debts  of  the  old  government  assumed,  and  mode  of  their  payment      .     .     .  469 

Opposition  to  these  measures 469 

Chiefly  directed  against  the  Bank 469 

Ground  of  this  objection,  —  government  not  one  of  paramount  powers    .     .  470 

Country  divided  geographically 470 

Jefferson  opposed  to  the  Bank          470 

Act  creating  it  approved  by  Washington,  Feb.  25,  1791 470 

The  Constitution  an  attempt  to  fuse  into  one  two  distinct  nations     ....  471 

The  South  could  not  commit  herself  to  the  guidance  of  ideas 471 

Could  take  nothing  on  trust 471 


XXxii  TABLE   OF   CONTEXTS. 

Could  derive  no  advantage  from  provisions  designed  to  promote  the  general 

welfare ^'^ 

The  Bank  opposed  as  a  political  rather  than  a  financial  measure      ....  472 

Its  charter ».     .     .  472 

Branches 473 

The  Act  a  masterpiece  of  its  kind 473 

The  existence  of  the  Bank   the  brightest  period  in  American  financial 

history 475 

State  Banks 475 

Continued  hostility  of  Jefferson  to  a  government  of  paramount  powers   .     .  475 

The  AUen  and  Sedition  Laws  his  opportunity 476 

Virginia  and  Kentucky  Resolutions  of  1798-99 476 

Illustrations  of  his  opinions  upon  the  nature  and  powers  of  our  government  477 
The  State  and  Federal  Governments  co-ordinate  branches  of  the  same 

government 478 

Hostility  to  the  Constitution  of  the  United  States 478 

To  the  Supreme  Court P    .     .     .     .  479 

Rebellion  the  corrective  of  oppression 479 

Complete  triumph  of  his  ideas  in  his  election,  1800 480 

His  views  accepted  as  the  authoritative  construction  of  the  Constitution  up 

to  1860 480 

The  theory  of  government  based  upon  them 480 

The  Rebellion  a  practical  application  of  them 480 

His  overthrow  a  revolution  in  the  literature  as  in  the  politics  of  the  country  481 
Mr.  Bancroft  asserts  him  to  be  the  author  of  all  the  centralizing  tendencies 

of  our  government 481 

Untruthfulness  with  which  the  history  of  this  country  has  been  written  .     .  481 

Alarm  created  by  the  Resolutions  of  1798 481 

Washington  to  Patrick  Henry 482 

Charter  of  the  Bank  expired  March  4,  1811 483 

Its  extension  refused 483 

War  of  1812 484 

The  Banks  of  the  country  suspend  payment  in  1814 484 

•Enormous  increase  of  State  Banks 484 

Amount  of  notes  outstanding  in  1811  and  in  1816 484 

Excessive  number  of  Banks  created  in  Pennsylvania  (note) 484 

Great  decline  in  value  of  the  bank-notes 484 

Necessity  for  a  new  Bank 485 

Recommended  by  Mr.  Madison 485 

Second  Bank  of  the  United  States  chartered  April  10,  1816 485 

Its  influence  in  restoring  specie  payments 486 

Measures  taken  by  it 486 

Continued  creation  of  new  Banks 487 

Disasters  which  followed 487 

Illustrated  in  the  case  of  Kentucky 487 

Gradual  recovery  of  the  country 487 

Connection  of  other  countries  with  the  financial  condition  of  our  own     .    .  488 
The  year  1826  memorable  for  commercial  disasters  both  in  this  country  and 

in  England 4gg 

The  cause  excessive  issues  of  paper  money 488 

General  Jackson's  first  Annual  Message  declares  the  Bank  unconstitutional  489 

The  message  received  with  surprise  and  indignation 489 

Referred  to  the  Committee  of  Ways  and  Means 489 

Report  of  the  Committee [ 49O 


TABLE   OF   CONTENTS.  XXxiii 

Report  of  the  Committee  upon  the  Bank 490 

The  questions  considered 490 

The  constitutionality  of  the  Bank 490 

Its  expediency 490 

The  expediency  of  founding  a  Bank  upon  the  credit  and  revenues  of 

tlie  government 490 

Constitutionality  of  the  Banks  established  by  the  uniform  concurrence  of 

all  departments  of  the  government 490 

Founded  by  the  framers  of  the  Constitution 491 

The  second  Biuik  recommended  by  Madison 491 

Mr.  Jefferson  approves  a  bill  creating  a  branch  Bank 491 

The  most  distinguished  RepubUcans  (Democrats)  in  favor  of  the  Bank  .  491 

Great  use  of  the  Bank  to  the  Government 493 

Both  great  political  parties  in  favor  of  its  constitutionality 493 

Supreme  Court  unanimous  in  its  favor 493 

The  question  of  constitutionality  forever  set  at  rest 493 

The  Bank  "  necessary  and  proper  "  to  carry  into  effect  the  power  granted  494 

May  be  created  as  an  incident  thereto 494 

Its  creation  one  of  the  lowest  attributes  of  sovereign  power 494 

Not  a  question  of  metallic  or  paper  currency 494 

But  of  a  paper  currency  subject  to  proper  control 494 

Immense  number  of  State  Banks  to  fill  the  place  of  the  first  Bank      .     .  494 

Great  excess  and  depreciation  of  the  currency 495 

Effect  upon  the  revenues 495 

Tendency  of  the  currency  to  the  level  of  the  least  valuable 496 

Amount  of  currency  in  circulation  in  1816 496 

Great  reduction  which  followed 496 

Losses  arising  from  its  use 497 

Uniform  value  of  the  currency  furnished  by  the  United  States  Bank  .     .  497 

Its  success  in  securing  resumption  of  State  Banks 499 

Obstacles  to  resumption 499 

Dangers  apprehended  from  the  Bank  imaginary 500 

Objections  to  the  use  of  State  Banks  by  the  government 501 

Importance  of  continuing  the  Bank 501 

Evils  certain  to  flow  from  its  discontinuance 501 

Summary  of  the  Report 502 

It  only  increased  Jackson's  hostility  to  the  Bank 502 

The  second  Bank  opposed  on  the  same  grounds  as  the  first 503 

The  revival  of  the  old  parties  at  the  close  of  Monroe's  administration    .     .  504 

John  Quincy  Adams  defeated  for  a  second  term 504 

Causes  of  his  defeat 504 

Sketch  of  the  revival  of  parties 505 

The  doctrine  of  strict  construction 505 

Denies  to  government  the  powers  necessary  to  its  existence 500 

Effect  upon  the  welfare  and  morality  of  the  people 506 

Finally  overthrown  by  the  partj'  of  progress  and  fi-eedom 506 

Continued  warfare  upon  the  Bank 507 

Mr.  Madison  asserts  its  constitutionality 507 

Judicial  and  legislative  precedents  the  rule  of  interpretation 507 

No  other  rule  compatible  with  the  existence  of  government 508 

General  Jackson's  reply 508 

The  will  or  opinion  of  each  department  of  government  its  rule  ....  509 

Jefferson  denied  to  government  the  powers  necessary  for  its  existence    ;     .  509 

c 


Xxxiv  TABLE   OF   CONTENTS. 

Jackson  inaugurated  the  reign  of  anarchy  and  barbarism 509 

Jackson  in  relation  to  the  secession  of  South  Carolina  (note) 509 

Subscribes  fully  to  the  doctrines  of  secession 510 

Identity  of  his  i)olitical  principles  with  those  of  Calhoun 610 

Mr.  Gallatin  in  reference  to  the  Bank 510 

The  disasters  following  the  expiration  of  the  first  Bank 511 

The  State  Banks  incompetent  to  furnish  an  uniform  currency     ....  511 

No  progress  made  toward  resumption  till  the  creation  of  the  Bank       .     .  512 

Services  rendered  by  it  to  the  State  Banks 512 

Resumption  impossible  without  it 512 

Manner  in  which  its  operations  were  conducted 513 

Jackson  denounces  the  Bank  as  mcompatible  with  the  liberties   of  the 

country "^^ 

As  an  engine  to  undermine  its  free  institutions 614 

To  control  the  amount  of  its  circulating  medium 514 

The  "money  power"  perfected  its  schemes  of  oppression  by  the  creation 

of  the  United  States  Bank '.     .  514 

Sought  to  regulate  the  value  of  all  the  labor  and  property  of  the  country  515 

"Waged  ruthless  and  unsparing  war  upon  the  people 515 

Impoverished  and  ruined  whole  cities  aiid  communities 515 

"  No  nation  but  the  freemen  of  the  United  States  could  have  come  out 

victorious  in  such  a  contest " 515 

The  difficulty  in  the  way  of  fighting  the  "moneyed  power" 615 

The  mischief  arising  from  its  control  over  the  currencj- 516 

The  arts  and  strength  of  the  "  moneyed  power  "   .     .     .     • 616 

"My  humble  efforts  to  restore  the  constitutional  currency  of  gold  and 

silver" 516 

General  Jackson's  attack  on  the  Bank  the  first  attempt  in  this  country  to 

array  labor  against  capital 616 

His  prodigious  untruthfulness  and  falsifications  of  history 617 

Manufacturers  and  merchants,  the  managers  of  Banks,  the  great  upholders 

of  free  institutions 617 

The  success  of  Jackson's  attack  upon  the  Bank  illustrates  that  of  Jeffer- 
son's upon  Hamiltoai 517 

Hamilton  saw  the  necessity  of  a  strong  government 517 

For  opposing  license  was  declared  an  enemy  of  civil  liberty 517 

The  War  of  the  Rebellion  an  overthrow  of  Jackson  and  Jeflferson      .     .     .  517 

A  full  vindication  of  Hamilton 517 

Gave  him  his  first  opportunity  to  be  heard 517 

Reversal  of  the  judgment  of  the  nation 618 

Who  were  the  dangerous  classes  at  the  epoch  of  Jackson  ? 518 

Who  were  the  upholders  of  political  and  commercial  freedom  ?       ....  518 

Liberal  and  upright  management  of  the  Bank 519 

Such  management  the  necessary  condition  of  success 520 

Memorializes  Congress  for  an  extension  of  its  charter 521 

This  extended  by  Congress 521 

Vetoed  by  Jackson 521 

Condition  of  the  Bank  at  the  time 521 

Consequences  of  the  refusal  to  extend  its  charter 521 

Rapid  increase  of  State  Banks 522 

Their  capital  and  note  circulation  in  1834 623 

Removal  of  deposits  from  the  United  States  to  State  Banks 523 

Disasters  and  distress  which  followed 523 


TABLE   OF   CONTENTS.  XXXV 

Reasons  for  General  Jackson's  attack  on  the  Bank 524 

Its  refusal  to  allow  him  to  control  its  patronage  (note) 524 

Refusal  to  cash  his  drafts 624 

His  brutal  treatment  of  the  New  York  Committee 525 

Rapid  increase  of  State  Banks 527 

Their  number,  capital,  and  circulation  in  1837 527 

The  delirium  of  extravagance  whicli  followed 527 

Speculation  seizes  upon  the  public  lands 527 

Enormous  purchases  of  these 527 

Sought  to  be  checked  by  the  Specie  Circular 527 

Purchases  of  public  lands  from  1829  to  1847  inclusive  (note) 528 

Great  accumulations  in  the  public  treasury 528 

These  divided  among  the  people 529 

Drain  upon  the  Banks 529 

They  suspend  specie  payment 529 

Their  suspension  and  resumption 630 

Enormous  contraction  the  condition  of  resumption 531 

Enormous  increase  of  imports  consequent  upon  the  inflation 631 

Excessive  decrease  as  the  condition  of  resumption 531 

Disastrous  effects  of  Jackson's  attempt  to  "  reform  the  currency  "  upon 

the  moral  and  material  condition  of  the  country 532 

"  Came  to  Washington  to  lift  American  legislation  out  of  the  forms  of  Eng- 
lish legislation  and  to  place  our  laws  on  currency  in  harmony  with 

the  principles  of  the  Republic  "  (note) 532 

Illustration  of  his  purpose  in  the  case  of  Sam  Houston 533 

The  latter  assaults  a  member  of  Congress  for  words  spoken  in  debate     .     .  533 

His  defence 533 

Declared  guilty  of  a  breach  of  privilege  of  the  House 534 

Mulcted  in  the  sura  of  $500 534 

Fine  remitted,  and  pardoned  by  Jackson 534 

The  latter  approved  of  the  assault 534 

The  Bank  receives  a  charter  from  th.e  State  of  Pennsylvania 535 

Enormous  price  paid  for  its  charter 535 

Does  not  resume  with  the  New  York  Banks 535 

Reasons  of  its  president,  Mr.  Biddle,  for  not  resuming 535 

The  credit  system  on  its  final  trial 535 

To  attempt  to  resume  would  be  to  place  the  Bank  in  the  power  of  the 

government 535 

Must  sustain  the  Banks  of  the  States 536 

Absurdity  of  his  reasons 536 

The  weakness  of  the  Bank  the  reason  for  not  resuming 536 

The  effect,  upon  Mr.  Biddle,  of  his  quarrel  with  General  Jackson    ....  536 

Becomes  incompetent  to  the  management  of  the  Bank 537 

The  Bank  resumes  in  1838 537 

Suspends  again  in  1839 637 

Resumes  in  1841 537 

Finally  suspends  February  1,  1841 537 

Causes  of  its  disastrous  failure 587 

Banking  in  Mississippi 538 

An  illustration  of  the  times 538 

The  Planters'  and  Union  Bank 538 

Rapid  increase  of  Banks 639 


XXXvi  TABLE   OF   CONTENTS. 

Amount  of  their  capital  and  loans  (note) ^^9 

The  explosion  which  followed ^^" 

Tlie  State  defaults  in  the  payment  of  interest 540 

Appeal  of  the  holders  of  these  bonds 540 

The  State  repudiates 540 

Report  of  a  Committee  of  the  Legislature 541 

Kepudiators  equally  honorable  with  "  Washington,   Jefferson,  Madison, 

Hancock,  and  Franklin  " 541 

Repudiation  vindicated  in  Congress  by  Jacob  Thompson 541 

His  speech  on  the  occasion 54w 

Persistent  action  of  the  Bondholders 544 

Bonds  declared,  by  the  courts  of  the  State,  to  be  legal  obligations       ...  544 

The  question  of  their  payment  referred  to  the  "  people  " 544 

Vote  against  their  payment 544 

Sketch  of  Banking  in  the  several  States 544 

In  Massachusetts 545 

In  New  York 545 

In  Ohio 547 

In  Indiana 549 

State  Bank  of  Indiana 550 

Banking  in  Michigan 551 

In  Illinois  and  Wisconsin 552 

Action  of  the  government  upon  the  suspension  of  specie  payments  in  1837  .  552 

Abandons  its  paternal  function  of  regulating  the  currency 652 

The  effect  of  its  interference 553 

Separates  itself  wholly  from  the  Banks 553 

All  the  revenues  to  be  collected  and  disbursed  in  coin 553 

Establishment  of  the  Independent  Treasury 553 

Third  Bank  chartered  by  Congress 553 

Vetoed  by  the  President 553 

The  process  of  resumption 554 

Great  contraction  of  the  currency 554 

Resumption  not  finally  accomplished  till  1843 554 

Increase  of  Banks  in  1847  and  1848 555 

Great  expansion  of  their  operations 555 

They  suspend  payment  in  1857 555 

Their  rapid  recovery 556 

Their  condition  in  1860 556 

Election  of  Mr.  Lincoln  to  the  Presidency 556 

Outbreak  of  the  civil  war 556 

Financial  condition  of  the  government 556 

The  Banks  unite  to  sustain  the  government 556 

Account  of  their  operations 556 

Those  of  New  York,  Philadelphia,  and  Boston  combine 557 

Their  capital  and  coin  reserves 557 

Undertake  to  supply  the  government  with  $150,000,000 557 

Urge  Mr.  Chase,  Secretary  of  the  Treasury,  to  draw  upon  them  in  the 

ordinary  course  of  business 558 

Independent  Treasury  modified  for  this  purpose 558 

Mr.  Chase  refuses  to  accede  to  their  request 558 


TABLE  OF  CONTENTS.  XXXvil 

Demands  to  be  paid  in  coin 558 

Success  of  their  operations  till  he  entered  the  field  with  his  own  notes     .  559 

The  Banks  receive  them  to  sustain  the  credit  of  the  government     .     .     .  559 

Their  reserves  drawn  in  proportion  to  the  amount  issued 559 

They  remonstrate  against  the  issue  of  government  notes 559 

Mr.  Chase  persists  in  their  issue 559 

The  Banks,  in  consequence,  compelled  to  suspend .     .     .     • 500 

Their  error  in  yielding  to  Mr.  Chase 561 

Resume  of  the  above 562 

The  war  might  have  been  carried  on  by  bank  paper  the  equivalent  of  gold  562 

Ignorance  and  perversity  of  Mr.  Chase 564 

His  object  not  money,  but  political  advancement 565 

The  folly  of  his  attempt  to  issue  demand  notes 567 

The  suspension  of  the  Banks  a  precautionary  measure 568 

Decline  in  value  of  the  government  notes 568 

Disastrous  consequences  of  Mr.  Chase's  conduct 568 

The  dilemma  of  the  government  on  the  suspension  of  the  Banks    ....  569 

Mr.  Chase's  Second  Annual  Report 569 

The  expenditures  of  government  $1,250,000  daily 570    y^ 

Could  not  borrow  coin  on  the  credit  of  the  government 570 

Could  not  borrow  bank-notes  on  better  terms  than  coin 570 

If  borrowed,  they  would  speedily  become  worthless 570 

The  alternative  legal-tender  government  notes 570 

Urges  their  issue • 571 

"A  wise  expedient  for  the  present  time,  and  an  occasional  expedient  in 

the  future  " 572 

Their  constitutionality  asserted  by  the  Supreme  Court  of  the  State  of 

New  York 672 

Resume  of  his  argument     . 572 

Draws  the  bill  for  the  second  issue  of  notes 573 

Their  decline  in  value  and  rise  of  gold 575 

Mr.  Chase  denies  the  issues  of  the  United  States  to  be  the  cause     .     •     .  575 

Or  the  currency  to  be  inflated 575 

The  currency  inflated  equal  to  the  whole  amount  of  government  notes     .     .  676 

Suspensions  of  Banks  unconnected  with  governments  always  temporary      .  577 

They  speedily  resume,  as  a  matter  of  self-prot«ction 577 

The  public  enforce  resumption  for  a  similar  reason 677 

Mr.   Chase  becomes  Chief  Justice  of  the  Supreme  Court  of  the  United 

States 577 

Declares  the  legal-tender  notes  to  be  unconstitutional 577 

Denies  that  he  ever  suggested  their  issue 578 

Absurd  untruthfulness  of  this  statement 573 

Advantage  of  a  currency  of  bank  over  one  of  government  notes     ....  578 

The  former  circulate  at  their  value 578 

The  value  of  the  latter  can  never  be  ascertained 578 

Criminality  involved  in  their  issue 579 

Mr.  Chase's  scheme  for  a  system  of  National  Banks 679 

The  circulation  of  the  Bank,  January  1,  1860,  $202,000,767 579 

"The  whole  of  this  circulation  constitutes  a  loan,  without  interest,  from 

the  people  to  the  Banks  " 579 

"  The  advantages  of  the  loan  to  be  transferred  from  the  people  to  the 

government " 580 

State  Banks  unconstitutional 680 


Xxxviii  TABLE   OF   CONTENTS. 

Government  should  interpose  to  provide  a  suitable  currency 580 

Circulation  of  Banks  in  inverse  ratio  to  their  solvency ' 

Value  dependent  upon  the  laws  of  thirty-four  States  and  the  character  of 

sixteen  hundred  institutions 

Two  modes  for  the  reformation  of  the  currency 58U 

First ;  an  issue  of  government  notes 

Second :  The  creation  of  a  system  of  Banks,  their  circulation  to  be 

secured  by  a  deposit  of  government  bonds 581 

The  second  mode  the  preferable  one ^ 

Bank-notes  a  credit  currency ^^^ 

Ur.  Chase's  misstatement  of  history °°^ 

The  constitutionality  of  State  Banks  never  questioned 682 

Tlie  constitution  always  invoked  by  demagogues o82 

Invoked  by  Jackson  against  the  United  States  Bank 582 

By  Mr.  Chase  against  State  Banks 582 

The  circulation  of  Banks  not  a  loan  from  the  people  without  interest      .     .  583 

Its  value  not  dependent  upon  the  laws  of  thirty-four  States 583 

The  greatest  amount  of  circulation  not  furnished  by  the  weakest  Banks      .  583 

Credit  circulation  never  desirable 583 

Absurdity  of  Mr.  Chase's  notions  in  reference  to  paper  money    ....  684 

His  role  that  of  General  Jackson 684 

Carries  his  scheme  for  a  system  of  National  Banks 585 

Its  consequences 58o 

How  the  currency  is  to  be  restored •  585 

Government  notes  to  give  place  to  a  Symbolic  Currency 585 

This  to  be  furnished  by  parties  possessed  of  capital 586 

A  convertible  currency  can  never  be  issued  by  a  government ...          .     .  586 

Can  be  issued  only  as  the  representative  of  capital 586 

Failure  of  Mr.  Chase's  attempt 587 

A  currency  issued  by  government  in  amount  sufficient  for  tiie  collection  and 

disbursement  of  the  revenues  would  circulate  at  only  a  small  discount  588 

Would  circulate  at  par  by  bearing  interest  at  a  low  rate 588 

Objections  to  the  issue  of  such  a  currency 588 

That  used  by  governments  as  well  as  by  the  public  to  be  symbolic      .     .     .  588 

Balances  only,  dischargeable  in  coin 589 

Preparation  for  resumption  will  create  large  balances  in  our  favor  ....  589 

A  Bank  of  the  United  States  an  essential  condition  of  resumption   ....  590 

Such  a  Bank  might  be  immediately  created 590 

Its  reserves  to  be  the  coin  in  the  Independent  Treasury 690 

By  its  means  the  government,  and  individuals  as  far  as  they  were  able, 

might  immediately  resume 590 

The  currency  to  be  in  great  measure  supplied  by  local  institutions       .     .     .  591 

A  National  Bank  indispensable  to  its  uniformity  in  value  and  amount      .     .  591 

The  government  notes  to  be  demonetized  as  the  condition  of  resumption      .  593 

To  be  funded,  not  paid  in  coin 594 

The  funding  will  take  place  only  when  money  is  plenty 694 

Their  discharge  in  coin  impracticable 595 

Funding  to  be  followed  by  the  repeal  of  tax  on  notes  of  State  Banks ...  596 
The  National  Bank  to  be  allowed  to  reclaim  the  securities  and  issue  notes 

without  special  provision  for  their  payment 696 

Amount  of  securities  held  by  the  National  Banks 597 

Probable  amount  of  liabilities  of  the  Banks  upon  resumption 597 


i 


TABLE   OF   CONTEXTS.  XXXIX 

The  note  liolclers  to  be  left  to  take  care  of  themselves 597 

Incapacity  of  government  officials  to  deal  with  the  subject 598 

Security  for  bank-notes  injurious  to  the  public 598 

The  New  England  and  New  York  systemscorapared 599 

The  losses  arising  from  the  use  of  Banks  not  due  to  their  circulation  .     .     .  600 

All  safety-fund  systems  radically  vicious 601 

Their  capital  loaned  to  the  government 602 

The  National  Banks  to  be  allowed  to  reclaim  their  bonds 602 

Plan  of  Mr.  Sherman,  Secretary  of  the  Treasury,  for  resumption   ....  603 

Not  called  upon  to  decide  wlio  is  to  issue  our  paper  money 603 

Nor  whether  it  is  to  be  plain  or  legal-tender  notes 603 

Government  notes  secured  by  bonds  "  the  currency  of  the  future  "      .     .  603 

Resumption  will  increase  the  amount  of  currency  in  circulation  ....  003 

Vast  amount  of  notes  hoarded       . 603 

United  States  notes  to  be  receivable  in  the  customs  revenues 604 

To  form  the  reserves  of  the  Banks 604 

Resumption  will  vastly  increase  the  amount  of  the  circulation      ....  604 

Confidence  established,  no  one  will  want  coin  for  notes 605 

Amount  of  coin  necessary  for  resumption -  605 

Absurdity  of  Mr.  Sherman's  propositions 605 

The  question  of  issuer  the  first  to  be  decided 606 

None  but  legal-tender  notes  can  be  maintained  in  circulation 606 

Notes  convertible  into  bonds  of  no  greater  value  tlian  tlie  bonds 606 

Mr.  Siierman's  "  currency  of  the  future  "  the  worst  possible  currency      .     .  607 

The  currency  to  be  enormously  reduced  as  a  condition  of  resumption      .     .  608 

Government  notes  to  be  wholly  retired 008 

Never  to  be  receivable  in  the  revenues 608 

Never  to  form  the  reserves  of  Banks 609 

Always  to  be  at  a  discount 609 

Confidence  no  substitute  for  capital 609 

Absurdity  of  the  statement  that  notes  are  now  hoarded 610 

Probable  amount  of  currency  in  circulation  upon  resumption 610 

Proper  method  of  resumption 611 

Apprehension  of  moneyed  monopolies,   with  a  single  issuer  of  currency, 

groundless 611 

Interests  of  Banks  always  in  harmony  with  those  of  the  public 612 

Necessity  of  a  National  Bank  to  the  South 612 

The  object  of  this  work  not  to  lay  down  systems,  but  to  demonstrate  the 

laws  of  money 613 

APPEXDIX. 

The  question  of  a  Double  Standard 614 

All  currencies  of  equal  cost  to  the  receiver 614 

The  question  of  kind  that  of  convenience 614 

Gold  more  convenient  than  silver  from  its  higher  relative  value      ....  614 

The  former  the  currency  of  nations  with  which  we  deal 614 

Importance  of  adopting  a  similar  standard 614 

The  adoption  of  a  double,  would  result  in  a  single  standard,  —  that  of  silver  615 
A  silver  standard  would  be  a  debased,  for  the  reason  that  it  would  be  an 

e.xceptional,  one 616 

Its  adoption  would  entail  great  inconvenience  and  loss  upon  the  nation    .     .  616 

The  question  not  even  open  for  discussion 616 


_^, 


Xl  TABLE   OF   CONTENTS. 

The  standard  of  value  not  the  instrument  by  which   the   exchanges  are 

effected 616 

Method  of  Resumption  —  Amount  of  Coin  kequired 617 

1st,   Provision  of  a  United  States  Bank 617 

2d,    Return  to  the  National  Banks  of  tlieir  securities 617 

"^3d,    Their  demonetization,  except  in  the  discharge  of  outstanding  contracts  617 

4th,  Retirement  of  the  government  notes  by  refunding 617 

Government  never  to  issue  its  notes  to  serve  as  money 617 

If  it  use  paper  money,  it  must  use  that  of  Banks 617 

Must  connect  its  operations  with  those  of  the  people 617 

The  Independent  Treasury  to  be  abolished 618 

The  theory  upon  which  this  institution  was  based 618 

■Injustice  of  compelUng  creditors  to  receive  the  notes  at  their  nominal  value  619 

Injustice  of  compelling  debtors  to  pay  debts  at  their  nominal  value      .     .     .  619 

The  value  or  price  at  which  the  outstanding  notes  are  to  be  retired    .     .     .  620 

That  at  which  they  were  used 620 

How  such  value  is  to  be  ascertained 620 

Government  not  chargeable  with  bad  faith  in  retiring  its  notes  at  less  than 

tlieir  nominal  value 620 

Notes  payable  at  the  pleasure  of  government  possess  no  determinable  value  620 

The  funding  of  the  notes  necessary  to  establish  their  value 621 

he  advantage  of  retiring  the  notes  by  funding  instead  of  by  payment    .     •  621 

Payment  would  immediately  retire  the  notes 621 

Funding  would  leave  thera  in  circulation  till  the  new  currency  appeared     .  621 

Amount  of  coin  to  be  held  by  the  Banks  upon  resumption 621 

Amount  to  be  held  by  the  public 621 

The  public  to  hold  reserves  as  well  as  Banks 622 

How  the  necessary  amount  of  coin  could  be  provided 622 

Danger  of  proceeding  too  rapidly  in  the  process  of  resumption 623 


THE  LAWS  OF  MONEY. 


The  first  lump  of  gold  or  silver  dug  from  the  earth,  as  soon 
as  its  beauty  and  uses  were  displayed,  became  the  object  of 
universal  admiration  ;  each  beholder  sought  to  become  its 
owner  by  exchanging  therefor  such  articles  of  merchandise  or 
property  as  he  possessed,  not  necessary  to  his  immediate  wants. 
This  preference  expressed  nothing  less  than  an  instinct  or 
sentiment  common  to  mankind.  In  the  earliest  periods  of 
which  history  or  tradition  gives  any  account,  and  which  are 
far  anterior  to  any  possible  concert  or  agreement  between 
different  peoples,  the  precious  metals  sustained  precisely  the 
relation  to  the  nature  and  wants  of  man  that  they  do  to-day. 
They  have  had,  through  all  time,  the  same  importance  in  the 
arts.  They  always  served  as  money  in  trade,  and  have  always 
been  esteemed  the  most  desirable  of  all  kinds  of  property  to 
hold.  Their  owner  has  always  been  able  to  command  what- 
ever a  people  possessed,  whether  civilized  or  savage,  among 
whom  he  might  happen  to  be  cast.  No  other  articles  of  prop- 
erty have  a  similar  power  ;  for,  with  the  exception  of  the  pre- 
cious metals,  what  is  highly  prized  by  one  is  often  little  valued 
by  another;  but  in  the  desire  for  gold  and  silver,  in  this  auri 
sacra  fames,  all  nations  and  races,  barbarous  and  civilized, 
Asiatic,  African,  European  and  American,  meet  on  the  same 
plane.  To  all  they  have  an  attractiveness  equal  in  durability 
and  intensity ;  and  among  all,  they  have  rendered  those  who 
possessed  them  masters  of  the  property  and  services  of  those 
who  did  not.i 

^  The  Book  of  Genesis,  which  is  among  the  earliest  records  which  have 
come  down  to  us,  and  which  describes  tlie  very  infancy  of  the  Hebrew  race, 
speaks  of  tlie  precious  metals  as  articles  of  established  use  and  value  from  the 
very  beginning  of  their  chronology ;   that  is,  from  the  creation  of  the  world. 

1 


2  THE  LAWS   OF  MONEY. 

Articles  for  which  such  an  universal  preference  was  felt, 
based  alike  upon  their  beauty  and  utility,  necessarily  became, 
by  virtue  of  such  preference,  the  highest  form  of  capital,  the 
universal  equivalent  —  money  ;  for  the  reason  that  every 
person  possessed  of  any  other  kind  of  merchandise  or  prop- 
erty not  required  for  his  own  present  use  or  consumption, 
has  always  sought  to  exchange  it  therefor,  from  the  certainty 
of  being  able,  by  its  means,  to  obtain  whatever  he  might 
wish  to  acquire.  Of  all  objects  those  are  most  prized  that  min- 
ister in  the  highest  degree  to  our  sense  of  beauty.  The  value 
of  gold  and  silver  often  sinks  into  insignificance  compared 
with  that  of  a  diamond,  or  of  some  exquisite  piece  of  painting 
or  sculpture ;  but  the  latter  values  are  exceptional  and  local, 
and  have  none  of  the  attributes  of  universality  and  uniformity 
which  gold  and  silver  have  maintained  with  equal  intensity 
from  the  dawn  of  civilization  to  the  present  hour.i 

The  qualities,  other  than  these  named,  which  gold  and  silver 
possess  which  fit  them  to  serve  as  money,  are  their  durability ; 
their  divisibility  without  diminishing  their  value  ;  the  capacity 
of  each  piece,  however  minute,  to  receive  an  impress,  de- 
noting its  quantity,  and,  consequently  its  value;  and  the 
uniformity  of  their  cost  and  supply.  No  other  articles 
whatever,  for  the  want  of  similar  qualities,  are  fitted  to  become 
money,  no  matter  how  great  may  be  their  relative  or  positive 
value. 

It  is  the  durability  of  the  precious  metals  which  has  secured 

"  And  a  river  went  out  of  Eden  to  water  the  garden,  and  from  thence  it  parted 
and  became  into  four  heads.  The  name  of  the  first  is  Pison  ;  that  is  it  which 
compasseth  the  whole  land  of  Havilah,  where  there  is  gold :  and  the  gold  of 
that  land  is  good."  —  Genesis,  ii. :  10,  11,  12. 

1  If  a  Greek,  who  lived  2,500  years  ago,  could  revisit  the  world,  the  only  arti- 
cles which  he  could  brhig  with  him  wliich  would  have  the  same  value  and  sig- 
nificance they  possessed  in  his  lifetime,  would  be  gold  and  silver,  either  in  the 
form  of  coin,  or  of  ornaments  wrought  from  them.  His  coat  of  mail,  his  pol- 
ished arms,  the  implements  of  his  industries,  his  household  goods, —  whatever 
constituted  his  wealth,  or  ministered  to  his  comforts  or  his  tastes,  —  all,  with  the 
exception  of  his  gold  and  silver,  would  have  long  since  been  mingled  in  com- 
mon dust.  His  language  might  be  wholly  unintelligible,  but  with  the  coins  in 
his  pocket,  still  retaining  their  wonderful  beauty  of  design  and  workmanship, 
which  might  have  been  paid  out  to  him  directly  from  the  mint,  and  with 
which  he  might  have  traded  and  travelled,  in  the  infancy  of  Greece,  —  he  could 
start  upon  a  tour  around  tlie  world,  with  a  certainty  that  they  would  be  received 
without  question,  at  a  value  determined  by  their  cost,  at  every  public  house, 
caravansary,  railroad  and  steamboat  office,  and  supply  every  want  in  his  long 
journey  of  25,000  miles. 


THE  LAWS   OF  MONEY.  3 

to  them  no  small  part  of  the  esteem  in  which  they  have  always 
been  held.  They  resist  all  action  of  the  elements,  and  are 
absolutely  indestructible  when  at  rest.  As  the  demand  for 
them  has  always  existed  with  equal  uniformity  and  force, 
their  durability  fits  them  to  become,  in  a  preeminent  manner, 
reserves  in  which  the  earnings  and  means  of  every  member  of 
society,  no  matter  how  humble,  can  be  treasured  up  for  all 
future  time.  Possessing  them,  he  is  at  once  raised  above  the 
possibility  of  want;  and  by  the  ease  with  which  they  can  be 
transported  or  concealed,  is  enabled  to  secure  a  degree  of 
independence  and  immunity  from  want,  without  which,  in 
many  countries,  life  itself  might  become  wholly  intolerable.^ 

It  is  in  overlooking  the  original  and  universal  attractiveness 
which  the  precious  metals  have  for  the  race  that  nearly  all  the 
errors  in  monetary  science  have  arisen.  "  Gold  and  silver,"  it 
is  urged,  "  cannot  feed,  clothe,  or  shelter  us  ;  they  cannot  even 
help  in  any  way  to  sustain  life.  How  idle,  then,  to  claim  a 
greater  value  for  them  than  for  articles  which  can !  "  There  is 
no  doubt  that  in  extreme  cases  a  person  would  part  with  un- 
told gold  for  a  morsel  of  bread,  a  cup  of  water,  or  a  plank  to 
save  from  drowning  ;  but  all  such  examples  are  exceptions,  not 
rules.  When  famine  or  want  threatens,  or  when  political  or 
social  disturbances  make  men  distrustful  of  the  future,  their 

1  The  precious  metals  possessed,  in  many  respects,  a  far  greater  importance 
in  ancient  than  iu  modern  times,  and  among  Eastern  than  Western  nations. 
So  long  as  no  considerable  progress  was  made  in  the  arts,  they  necessarily  served 
as  the  materials  with  which  were  fabricated,  in  a  great  measure,  articles  of  orna- 
ment or  luxury.  The  Eastern  races  have  never  been  able,  like  the  Western,  to 
oppose  an  effectual  resistance  to  the  tyranny  and  exaction  of  their  rulers ;  and 
most  pitiable  would  have  been  their  condition  had  there  not  been  some  form  of 
property,  the  possession  of  which  could  be  effectually  concealed,  its  value  in  the 
mean  time  remaining  unimpaired.  Their  whole  history  has  been  one  of  oppres- 
sion on  one  side  and  of  arts  to  foil  it  on  the  other.  "  The  Rajahs,"  says  Mr. 
Scrafton,  in  his  tract  upon  the  government  of  Hindostan,  "  never  allow  their 
subjects  to  rise  above  mediocrity.  The  Mohammedan  governors  look  upon  the 
growing  riches  of  their  subjects  as  a  boy  on  a  bird's  nest ;  they  eye  their  pro- 
gress with  impatience,  and  come  with  a  spoiler's  hand  and  ravish  the  fruits  of 
their  labors.  To  counteract  this,  the  Gentoos  bury  their  money  under  ground  ; 
and  often  with  such  secrecy  as  not  to  trust  even  their  own  children  with  the 
knowledge  of  it;  and  it  is  amazing  what  they  will  suffer  rather  than  betray  it. 
Their  tyrants  use  all  manner  of  corporal  punishments,  but  that  often  fails  ;  for 
with  a  resentment  prevailing  over  the  love  of  life,  they  frequently  rip  up  their 
bowels,  or  poison  themselves,  and  carry  tlieir  secret  to  the  grave.  The  sums  lost 
in  this  manner  in  some  measure  account  why  the  silver  in  India  does  not 
appear  to  increase,  though  there  are  such  quantities  continually  coming  into  it 
and  none  going  out." 


4  THE  LAWS   OF  MOXEY. 

first  care  is  to  lay  in  abundant  stores,  not  of  food  and  clothing, 
but  of  gold  and  silver,  assured  that  with  these,  they  can  never 
be  long  in  want  of  other  articles,  whatever  may  happen. 

Without  some  article  or  articles,  for  which  a  supreme  pref- 
erence was  felt,  there  could  have  been  no  adequate  motive  to 
industry;  for  without  them,  industry  could  have  produced 
nothing  beyond  the  food,  clothing  and  shelter  necessary  to 
sustain  life  upon  its  lowest  plane.  There  cannot,  in  the  nature 
of  things,  be  a  continued  or  superior  preference  for  food  over 
clothing.  Each  is  indispensable  in  its  way ;  but  a  person  pos- 
sessed of  one  is  not  necessarily  nearer  any  article  of  merchan- 
dise or  property  he  may  wish  to  acquire,  than  if  he  possessed 
the  other.  With  either,  he  could  only  reach  such  article  by 
the  exchange  therefor  of  that  which  he  possessed.  Exchanges 
made  in  this  manner  involve,  as  a  rule,  labor  and  expense 
greater  in  amount  than  the  value  of  the  article  sought  for,  after 
it  is  acquired.  So  long,  therefore,  as  a  people  have  no  other 
mode  of  disposing  of  their  products,  but  by  the  exchange  of 
one  article  of  consimiption  for  another,  they  will  produce  only 
such  as  they  can  directly  consume.  They  will  necessarily  remain 
barbarous  or  savage  ;  and  every  ci\ilized  society  accustomed  to 
the  use  of  the  precious  metals  as  money,  in  ceasing  to  use  them 
as  such,  ine\'itably  tends  to  that  condition  of  barbarism  from 
which,  with  almost  infinite  toil,  it  has  so  slowly  arisen. 

The  first  step,  therefore,  necessary  to  be  taken  by  a  person 
possessed  of  property  other  than  gold  and  silver,  in  order  to 
reach  by  means  of  it,  some  other  article,  was  to  convert  it  into 
them.  Such  conversion  is  itself  an  act  of  barter  ;  for  gold  and 
silver  are  merchandise  equally  with  food  and  clothing :  but  it 
is  the  only  act  of  barter  which  is  certain,  by  one  further  ex- 
change, to  secure  to  the  seller  ^hat  he  may  wish  to  obtain.  A 
person  possessed  of  food  will  not  necessarily  have  any  adequate 
motive  to  exchange  it  for  clothing,  for  such  exchange  might 
not  advance  him  a  single  step  toward  the  object  of  desire.  No 
prudent  man  ever  thinks  of  exchanging  his  stock  of  merchan- 
dise for  one  of  other  kinds,  because  that  which  he  possesses 
does  not  happen  to  be  in  active  demand.  If  it  be  made  up  of 
articles  indispensable  for  consumption,  he  will  hold  it  till  a 
demand  arises.    He  will  rest  assured  that,  sooner  or  later,  some 


THE   LAWS   OF   MONEY.  5 

one  will  take  it  off  his  hands  at  some  price,  to  be  paid  in  money. 
He  may  lose  by  holding ;  but  he  might  incur  a  greater  loss  by 
an}^  attempt  to  sell  or  exchange  it  for  merchandise  other  than 
that  which  he  wished  to  secure  or  consume,  as  he  would  be  in 
the  same  dilemma  in  the  latter  case  as  in  the  former.  Such 
an  exchange,  if  made  at  aU,  would  have  to  be  at  the  estimated 
value  of  his  merchandise  in  money,  leaving  him  as  far  from  a 
sale  for  cash  as  before  the  exchange  was  made. 

If  without  the  precious  metals  tliei-e  could  be  no  exchanges 
but  in  kind,  still  less  could  there  be  di\'ision  of  labor,  upon 
which  every  tiling  deserving  the  name  of  wealth  is  based,  and 
without  which  only  the  rudest  fabrics  can  be  produced.  Divi- 
sion of  labor  is  possible  only  where  the  laborer  or  workman  can 
be  paid  in  some  article  which  he  may  not  produce,  but  by 
means  of  wliich  he  can  by  direct  exchange,  reach  any  other 
article  he  may  wish  to  acquire.  If  it  were  possible  to  exchange 
a  skin  for  a  quarter  of  venison,  it  is  not  possible  that  a  person 
who  polishes  and  fits  the  main-spring  of  a  watch  should  have 
that  which,  in  itself,  would  be  received  in  payment  for  food  and 
shelter. 

All  sales  of  merchandise,  therefore,  before  commerce  could 
assume  any  considerable  dimensions,  were,  from  the  very  nature 
of  things,  made  payable  in  the  precious  metals.  For  the  same 
reason,  all  contracts  arising  from  such  sales,  or  for  labor  or  ser- 
vice, to  be  executed  presently  or  in  the  future,  were  held  to  be 
payable  in  them,  whether  or  not  they  contained  such  provision, 
not  only  for  the  purpose  of  securing  to  the  party  to  be  paid 
that  by  which  he  coidd  reach  by  direct  exchange  any  other 
article  of  property,  but  for  the  purpose  of  defining  the  extent  of 
liability  to  be  incurred  on  either  side.  If  a  person  were  to  re- 
ceive 1,000  bushels  of  wheat  at  the  expiration  of  ten  years,  he 
could  form  no  idea  of  what  it  would  realize  to  liim  till  it  was 
received  and  sold  for  coin.  If  he  were  to  receive  81,000  in  coin 
in  ten  years,  he  would  know  its  value  as  well  when  the  con- 
tract was  made  as  when  it  was  to  be  executed.  Its  value  would 
be  the  same,  or  very  nearly  the  same,  at  either  period.  The 
wheat  might  not  have  one-half,  or  it  might  have  double,  the 
value  when  it  was  to  be  paid,  that  it  had  when  the  contract  for 
its  pa}Tnent  was  made.  Neither  buyer  nor  seller,  therefore, 
could  with  any  safety  enter,  nor  would  either  as  a  rule,  enter 


6  THE   LAWS   OF   MONEY. 

into  contracts  not  presently  to  mature,  that  were  not  to  be  dis- 
charged in  coin. 

As  the  precious  metals  are  always  in  demand  at  the  cost  of 
their  production,  their  value  is  absolute  ;  depending  upon 
one  condition,— cost.  That  of  all  other  articles  is  relative, 
depending  upon  two  conditions,  —  demand  and  cost.  From 
absence  of  demand,  their  value,  either  in  the  precious  metals 
or  in  other  articles,  may  not  equal  one-half  their  cost.  In  all 
transactions  the  former  pass  at  their  absolute  value.  As  all 
other  articles  must  take  the  form  of  the  precious  metals,  or  of 
that  which  possesses  a  value  equivalent  thereto,  before  they 
can  be  made  available  to  their  owners ;  and  must  be  accepted 
in  exchange,  at  theii*  absolute  value  in  gold  and  silver,  the 
latter  must  be  the  standard  of  value  by  which  that  of  all 
other  articles  is  measured.  As  they  are  money  by  virtue  of 
their  value,  they  are  standards  of  value  by  vii-tue  of  the  same 
attribute.  When  they  pass  as  money,  the  standard,  as  well  as 
the  instrument  of  exchange,  passes  in  the  same  article,  by  the 
same  act.  The  tiling  itself,  unlike  a  foot-ride  or  pound  weight, 
is  the  standard,  —  the  measure  of  value.  Other  measures,  those 
of  extent  or  quantity,  do  not  pass  in  the  sale  of  that  wliich  they 
measure.  The  value  of  such  measures  has  no  relation  what- 
ever to  that  of  the  articles  measured.  But  money,  the  medium 
of  exchange,^  and  money  the  measure  or  standard  of  value,  are 
identical  things.  The  words  that  express  them  are,  in  the 
strictest  sense,  synonymous  terms. 

From  what  has  preceded,  the  transcendent  importance  of  the 
precious  metals  in  the  development  and  progress  of  society 
will  be  at  once  appreciated.  They  are  the  instruments,  and 
the  only  ones,  by  virtue  of  their  being  the  highest  form  of 
capital,  the  universal  equivalents,  which  render  possible  the 
very  first  step  towards  a  higher  life.  They  are  the  foundation 
upon  which  rests  the  vast  superstructui-e  of  civilized  society. 

1  The  term,  "  medium  of  exchange,"  is  one  of  recent  origin,  growing  out  of  the 
use  of  paper  money,  from  which  the  idea  of  value  has  become  in  great  measure 
dissociated.  So  long  as  exchanges  were  effected  in  kind,  —  one  article  of  con- 
sumption being  exchanged  for  another,  —  each  were  equally  "media  of  ex- 
change." The  term,  as  ordinarily  used,  is  one  of  the  great  stumbling  blocks  in 
the  way  of  a  proper  elucidation  or  understanding  of  the  subject  of  money.  It 
is  one  of  Bacon's  "  Idols  of  the  Market." 


THE   LAWS   OF   MONEY.  7 

Witlioiit  them  there  could  have  been  no  exchanges,  no  -wealth, 
no  government,  no  institutions,  no  history ;  nothing  but  the 
eternal  iteration  of  savage  or  barbarous  existence.  The  mo- 
ment they  are  disused,  society  is  without  any  adequate  standard 
by  which  the  value  of  its  industries  can  be  measured.  With- 
out them,  utter  chaos  would  at  once  take  the  place  of  the  order 
which  now  conducts  to  prosperous  ends  the  industr}'  of  every 
laborer,  —  whether  he  be  a  cotton-spinner  in  England,  a  farmer 
raising  wheat  on  the  banks  of  the  Missouri,  a  cultivator  of  tea 
in  China,  a  grower  of  rice  on  the  banks  of  the  Ganges  or  the 
Nile,  or  of  sugar  in  Brazil,  —  and  awards  to  each  an  exact  com- 
pensation, measured  by  a  common  standard,  for  the  value  of 
his  contribution  to  the  general  stock  from  which  all  are  fed 
and  sustained.  With  them,  a  people,  consmning  the  products 
of  another,  have  no  need  to  inquire  what  those  of  their  own  in- 
dustries will  bring  in  the  countries  from  which  their  imports 
are  to  be  made,  but  only  what  their  own  products  are  worth 
in  the  precious  metals,  at  their  own  doors.  By  their  means,  at 
the  close  of  each  day,  the  most  unlettered,  equally  with  the 
most  intelligent  and  learned,  can  measure  exactly  the  value  of 
his  industries,  and  apply  the  necessary  corrective,  should  it  be 
found  that  they  had  not  been  properly  directed  or  sufficiently 
remunerative.  As  without  such  standards  there  could  be 
neither  industry,  wealth,  nor  civilization,  the  inference  is 
irresistible  that  the  universal  demand  for  the  precious  metals 
at  their  cost,  and  the  uniformity  of  their  supply,  are,  equally 
with  moral  laws,  part  of  God's  pro^-idence  with  man. 

As  gold  and  silver  are  capital  as  well  as  money,  and  are 
always  in  demand  to  serve  as  the  basis  of  reproduction, 
either  by  their  conversion  into  forms  other  than  that  of  coin, 
or  in  exchange  for  food,  implements,  and  the  like,  every  one 
possessed  of  them,  where  governments  are  sufficiently  strong 
to  enforce  the  fulfilment  of  contracts,  will  seek  to  loan  what- 
ever he  may  have  in  excess  of  his  own  immediate  wants,  for 
the  income  they  will  peld.  The  opportunity  for  loaning 
them  at  usury  does  not  depend,  as  is  too  often  supposed, 
upon  the  necessities  of  governments  or  individuals  for  capital 
for  their  ordinary  expenditures,  but  upon  the  uses  to  which 
they  can  be  profitably  applied.  The  greater  the  progress  made 
in  knowledge,  and  in  the  arts  and  sciences ;  the  more  perfect 


8  THE  LAWS   OF  MONEY. 

the  means  of  production  and  distribution,  the  greater  must 
be  tlie  disproportion  of  capital  to  the  demand  that  must  exist 
for  it ;  the  more  powerful  the  motives  to  industry  and  toil, 
and  the  higher  the  rates  of  interest  which  borrowers  can  afford 
to  pay.  From  the  material  progress  that  has  been  made  within 
the  last  fifty  years,  a  significance  and  value  have  been  given  to 
capital  never  before  known.  That  it  must  steadily  increase 
in  importance  rests  upon  the  fact  that  God  is  Infinite  and  man 
finite.  The  mission  of  man  is  to  unfold  His  law^s,  and  render 
them  the  instruments  in  promoting  his  own  welfare.  The 
greater  his  progress,  the  wider  the  field  spread  out  before  him. 
Every  step  he  takes  becomes  an  incentive  and  an  aid  to  the 
next.  The  more  he  achieves  in  any  du-ection,  the  stronger 
the  motive  and  the  greater  the  power  for  new  acquisitions. 
Every  new;  discovery  is  a  fresb  demand  for  capital.  I  need 
only  refer  to  the  vast  sums  now  called  for,  for  the  purpose  of 
utilizing  the  discoveries  which  the  present  generation  has 
made  in  electricity,  and  the  almost  infinite  sums  yet  required 
for  the  full  development  of  that  mighty  force  upon  wdiich 
seem  to  rest  all  the  phenomena  of  the  universe. 

When  loans  of  the  precious  metals  could  be  safely  made  at 
usury,  a  principle  or  element  of  almost  infinite  value  and  power 
was  introduced  into  human  affairs.  With  gold  and  silver  to 
serve  as  the  instruments  of  exchange,  the  means  of  acquisition 
were  for  the  first  time  given  to  the  race.  By  loans  of  them, 
with  interest  payable  in  kind,  its  acquisitions  could  be  treas- 
ured up,  and  be  made  to  bear  fruit  for  all  coming  time.  Until 
interest  could  be  obtained  for  their  use,  every  person  retained 
whatever  he  acquired,  in  his  possession,  until  forced  by  his 
necessities  to  part  with  them.  So  soon  as  they  could  be  safely 
loaned,  no  one  would  keep  the  possession  of  an  amount  greater 
than  that  required  for  liis  immediate  wants.  Thenceforth  the 
whole  face  of  society  was  changed.  Order  and  good  govern- 
ment were  the  conditions  necessary  to  induce  the  possessors  of 
capital  to  loan  it,  for  they  were  the  only  conditions  under 
which  the  borrowers  could  prosecute  their  industries  in  a 
manner  which  would  enable  them  to  repay  their  loans.  Order 
and  good  government,  consequently,  have  in  modern  times 
been  the  work  of  the  industrial  and  commercial  classes.  The 
moral  well-being  of  mankind  rests  upon  its  material  well-being. 
In  the  promotion  of  both,  the  precious  metals,  with  loans  of 


THE  LAWS   OF  MONEY.  9 

them  at  usiuy,  stand  forth  as  the  prime  and  paramount 
factors. 

With  loans  of  the  precious  metals  at  interest,  their  possessor 
could  not  only  make  provision  for  himself,  and  for  his  family 
after  his  decease,  but  he  could  found  institutions  for  the  cult- 
ure of  learning,  of  art,  of  science,  or  for  the  support  of  some 
charity,  —  provisions  that  should  suffer  no  abatement,  but 
secure  the  same  results  one  hundred  or  one  thousand  years 
after  his  death,  as  during  his  lifetime  and  under  his  own  super- 
vision. In  other  words,  he  could  invest  himself,  as  it  were, 
with  the  attributes  of  immortality.  He  could  make  no  such 
provisions  by  dedicating  thereto  great  stores  of  food  and  cloth- 
ing. All  such  articles  are  speedily  perishable,  so  that  with  an 
abundance  of  both,  unless  exchanged  for  gold  and  silver,  their 
possessor  might  presently  come  to  want.  No  permanent 
foundation,  therefore,  can  be  made,  resting  upon  such  kinds  of 
property.  Should  such  an  attempt  be  made,  no  one  could  ever 
be  found  who  would  receive  them  on  loans,  agreeing  to  pay 
for  their  use  interest  in  kind,  —  to  pay,  for  example,  six  bushels 
of  wheat,  annually,  for  a  loan  of  one  hundred  bushels.  He 
would  not  run  the  risk  of  the  fluctuations  in  its  value  ;  or  he 
might  wish  to  change  his  residence  to  countries  or  districts, 
from  which  the  cost  of  sending  Avheat  to  the  place  of  payment 
might  exceed  many  times  its  value.  It  is  impossible,  there- 
fore, that  there  should  be  any  other  final  solvents  of  transac- 
tions but  the  precious  metals,  while  human  nature  is  what  it 
is.  No  commercial  people  ever  have  adopted,  nor  will  they 
ever  voluntarily  adopt,  standards  of  value  other  than  those 
Providentially  appointed.  If  other  standards  are  ever  used, 
it  is  only  because  governments  interpose  to  set  aside  natural 
laws.  But  all  such  attempts  prove  in  the  end  utterly  futile  ; 
for  no  government  can  long  compel  the  people  to  act  in  direct 
violation  of  their  highest  interests.  However  great  the  depart- 
ure, the  natural  standards  will  always  be  returned  to ;  but 
often,  unfortunately,  not  until  both  government  and  people 
are  involved  in  common  ruin. 

As  soon  as  any  considerable  progress  had  been  made  in  com- 
merce and  trade,  contracts  to  pay  money  would  be  authenticated 
by  convenient  and  proper  instruments.  The  transfer  of  these 
would  operate  to  transfer  that  which  they  represented.  With 
the   progress  of  social  order,  some  of  these  instruments,  for 


10  THE  LAWS   OF   MONEY. 

greater  convenience,  would  be  made  payable  to  their  possessor 
or  bearer,  and  would  transfer,  by  mere  delivery,  their  constitu- 
ents. In  this  way,  bills  of  exchange  representing  merchandise ; 
promissory  notes;  and,  later,  notes  of  banks  and  bankers 
payable  on  demand  to  bearer,  came  into  use. 

While  exchanges  of  property  must  always  be  made  at  the 
standard  of  the  precious  metals,  it  by  no  means  follows  that 
they  may  not  be  made  without  their  actual  intervention. 
Their  use  is  always  an  act  of  barter,  in  which  equivalents  in 
value  are  mutually  exchanged.  There  is  no  generic  distinc- 
tion whatever,  between  an  exchange  in  which  a  barrel  of 
flour  is  given  for  a  hat,  and  one  in  which  ten  gold  dollars  are 
given  for  it.  The  first  may  be  termed  aimjjle  barter,  as 
articles  which  each  party  may  produce  are  directly  exchanged. 
But  the  use  of  gold  and  silver  involves  two  exchanges  before 
a  party  possessing  merchandise  can  reach  that  which  he  may 
wish  to  acquire,  —  the  exchange,  for  example,  of  the  barrel  of 
flour  for  ten  gold  dollars,  and  the  exchange  of  ten  gold  dollars 
for  the  hat.  The  latter  process,  therefore,  may  be  termed 
double  barter;  for  in  it  a  third  agent,  or  factor,  has  to  be 
present,  which  is  not,  in  the  function  it  performs  or  in  the 
manner  in  vdiich  it  is  used  at  the  moment,  the  subject  of 
consumption. 

When  the  vast  magnitude  of  the  transactions  now  taking 
place  is  considered,  the  importance  of  eliminating  from  them 
an  agent  or  factor  having  a  value  equal  to  the  articles  ex- 
changed will  be  readily  appreciated.  The  value  of  the  mer- 
chandise moving  between  Great  Britain  and  the  United  States 
equals  many  hundreds  of  millions  annually.  Were  the  pre- 
cious metals  required  to  move  between  them  as  currency,  in 
equal  volume,  the  interest  on  so  vast  a  sura  would  have  to  be 
added  to  the  price  of  the  merchandise  to  be  paid  by  the  con- 
sumer. To  this  would  have  to  be  added  the  loss  by  attrition, 
estimated  as  high  as  one  per  cent  annually  ;  and  the  cost  of  its 
transportation  which  would  equal  many  millions  every  year. 
But  such  burdens  might  be  by  no  means  the  greatest  of  those 
resulting  from  an  attempt  to  effect  all  the  exchanges  of  prop- 
erty by  the  use  of  a  metallic  currency.  The  hope  of  seizing  it  in 
transit  would  cover  every  sea  with  pirates,  from  whose  vigilance 
none  could  escape,  and  whom  no  punishment  would   deter. 


THE   LAWS   OF   MONEY.  11 

Instead  of  sailing  singly,  a  large  number  of  vessels  would  have 
to  go  in  company,  convoyed  by  powerful  ships  of  war.  Were 
all  the  payments  within  the  same  community  to  be  made  in  it,  a 
file  of  porters,  guarded  by  soldiers,  would  be  required  by  every 
great  merchant  where  an  office-boy  now  suffices.  Had  no 
mode  been  devised  of  effecting  exchanges  but  by  the  actual 
intervention  of  the  precious  metals,  commerce  and  trade 
would  not  have  reached  one-tenth  their  present  colossal 
proportions. 

The  manner  in  which  the  use  of  gold  and  silver  are  dis- 
charged from  transactions  between  nations,  and  between  com- 
munities widely  separated,  comes  within  the  experience  of 
almost  every  man  of  affairs.  An  importer  in  the  city  of  New 
York  does  not  accompany  his  order  upon  a  manufacturer  in 
England  with  the  corresponding  amount  of  coin,  *  but  buys  of 

*  Coinage  —  by  means  of  which  pieces  of  metal  receive  an  impress  denoting 
their  weight  and  fineness,  consequently  their  value,  and  which  has  been  adopted 
by  all  civilized  nations  —  is  of  comparatively  recent  origin.  No  traces  of  it  have 
been  found  among  the  remains  of  Assyrian  or  Egyptian  art;  and  Egyptian 
civilization,  running  tlirough  periods  far  greater  than  those  which  measure  the 
life  of  subsequent  nations,  had  begun  to  decline  before  coinage  was  used.  Among 
all  the  ancient  nations,  including  the  Hebrews  and  Phoenicians,  as  well  as  the 
Assyrians  and  Egyptians,  the  precious  metals  passed  by  weight.  When 
Abraham  weighed  out  at  Ephron  the  silver  which  he  had  named  in  the  audience 
of  the  sons  of  Heth, —  "  four  hundred  shekels  of  silver,  current  money  with  the 
merchant,"  — he  undoubtedly  used  scales  and  denominations  of  weight  common 
to  the  whole  East.  The  language  indicates  as  thorough  a  familiarity  with  the 
use  of  money  as  does  that  used  in  financial  newspaper  articles  of  the  present  day. 
So  Joseph  gave  to  Benjamin  "  three  hundred  pieces  of  silver."  These  pieces 
were  undoubtedly  of  very  nearly  equal  weight,  —  consequently  of  value.  Tlie 
word  piece  had  a  significance  precisely  similar  to  that  which  we  attach  to  the 
word  dollar. 

The  invention  of  coinage  has  been  usually  ascribed  to  Pheidon,  who  reigned 
about  750  B.C.,  in  the  island  of  yEgina,  a  dependency  of  Argos,  and  at  that  time 
one  of  the  greatest  commercial  emporiums  of  Greece.  Previous  to  its  invention, 
the  form  in  which  the  precious  metals  were  used  as  money  was  that  of  pins,  or 
wires,  silver  being  the  metal  chiefly  employed.  Of  these,  a  certain  number  made 
a  conventional  handful,  or  drachma.  This  form  was  gradually  exchanged  for 
that  of  solid  pieces,  or  wedges,  which  may  be  considered  as  a  step  toward  coin- 
age. To  secure  pieces  of  uniform  value,  coinage  was  properly  made  a  function 
of  government,  its  insignia  or  stamp  being  the  proper  guaranty  for  the  value  of 
the  coins  uttered.  The  JEginian  scale,  as  it  was  termed,  was  adopted  in 
Peloponnesus,  in  all  the  Dorian  States,  in  Boeotia,  Thessaly,  Macedonia,  and 
throughout  Northern  Greece.  Another  scale,  however,  soon  arose,  called  the 
Euboeic,  which  was  adopted  in  Athens,  and  in  the  Ionic  States  generally,  as  well 
as  in  Euboea.  Their  denominations  were  the  same,  —  100  drachmas  to  the  mina, 
and  60  minaj  to  the  talent,  —  but  the  value,  by  weight,  of  the  scale  of  the  latter 
to  the  former  was  as  six  to  five. 


12  THE    LAWS    OF    MONET. 

a  neighbor  shipping  breadstuffs  to  that  country  a  bill  drawn 
against  such  shipment,  paying  the  value  of  such  bill  or  ship- 
ment in  the  local  currency  of  the  city,  at  the  standard  of  coin, 
and  sends  it  forward  in  the  place  of  so  much  money.  The 
Encrlish  manufacturer  collects  the  proceeds  of  the  same  in  the 
local  currency  of  that  country,  and  credits  his  New  York  cus- 
tomer with  the  amount.  The  use  of  such  bill,  in  the  manner 
described,  obviates  that  of  a  corresponding  amount  of  capital 
in  the  form  of  money.  Proceedings  reciprocally  the  same  are 
had  by  an  English  importer  of  American  produce.  In  this 
way,  by  the  use  of  bills,  merchandise  is  offset  against  merchan- 
dise, and  papnents  are  made  thereby  as  effectuall}'  as  if  made  in 
money.  If  the  exports  of  the  two  countries,  the  one  to  the  other, 
were  the  same  in  value,  no  money  —  coin,  or  bullion  —  would 
move  in  the  operations  between  them,  no  matter  how  great 
their  magnitude.  It  would  only  move  when  there  was  a  want 
of  bills,  and  consequently  of  merchandise,  to  make  good  the 
deficit  of  those  kinds  wliich  are  the  ordinary  subjects  of  con- 
sumption. The  balance  arising  on  either  side  would  be  a 
debt  for  which  the  creditor,  for  the  reasons  already  described, 
would  receive  nothing  but  gold  and  silver,  — the  liighest  form 

From  Greece  coinage  was  first  introduced  into  Egypt,  by  the  successors  of 
Alexander  the  Great,  about  300  B.C.  It  was  not  until  about  150  B.C.  that 
Antiochus  gave  permission  to  Simon  Maccabaeus  to  coin  money  "  with  his  own 
stamp."  This  is  the  first  instance  of  coinage  among  tJie  Hebrews.  Through  the 
Greek  colonies,  which  were  numerous  along  the  shores  of  the  Mediterranean, 
the  art  was  gradually  diffused  throughout  the  then  known  world.  As  coinage 
gradually  came  into  universal  use  ;  as  every  nation,  as  well  as  almost  every 
community  of  any  considerable  importance,  had  its  mint,  —  a  vast  number  and 
variety  of  coins  were  issued;  and  as  the  impress  they  received  commemorated 
events,  or  symbolized  ideas  or  sentiments,  and  as  great  numbers  Jiave  come 
down  to  us,  they  have  proved  of  almost  inestimable  value  in  illustrating  ancient 
history  and  life. 

While  all  communities  and  nations  have  entertained  a  similar  sentiment  in 
reference  to  the  desirableness  or  value  of  the  precious  metals  —  a  sentiment  which 
transcends  all  agreement  or  concert  between  them  —  they  no  sooner  came  to  the 
subordinate  matter  of  coinage  than  tliey  were  as  wide  apart  as  the  poles.  Noth- 
ing could  be  more  convenient  than  a  coinage  common  to  all  nations ;  yet  nothing 
can  be  more  dissimilar  than  tlie  denominations  of  their  money.  It  does  not  seem 
probable  that  they  will  ever  be  any  better  agreed  in  this  matter  than  now.  If 
money,  as  all  writers  have  claimed,  be  an  invention,  why  was  not  a  common  stand- 
ard of  coinage  invented  at  the  same  time  ?  That  all  nations  are  agreed  upon  the 
value  of  money,  and  none  upon  the  forms  or  denominations  to  be  used,  although 
uniformity  in  tliis  respect  is  a  matter  of  very  great  importance,  is  of  itself  suffi- 
cient evidence  that  the  value  of  the  metals  from  which  it  is  coined,  rests  upon  a  law 
far  higher  than  the  convenience  of  their  use  as  media  of  exchange. 


THE    LAWS    OF    MONEY.  13 

of  capital.  All  balances  arising  in  commerce,  the  world  over, 
are  held  to  be  payable  in  the  same  manner.  Every  transaction, 
therefore,  is  upon  the  basis  of  coin,  as  to  value,  even  when  it 
does  not  interpose,  and  all  balances  have  to  be  actually  paid  in 
it,  or  in  promises  to  pay  it,  coupled  with  an  agreement  to  pay 
interest  for  any  forbearance  of  present  payment. 

The  exchanges,  therefore,  between  communities  widely  sep- 
arated are  now  in  great  measure  eifected,  not  by  the  use  of  the 
precious  metals,  but  by  symbols,  or  evidences,  of  merchandise 
moving  between  them.  Such  symbols,  or  evidences,  serve  as 
money  equally  with  coin.  They  perform  in  the  exchange  of 
merchandise  precisely  the  functions  of  coin.  A  bill,  for  example, 
drawn  by  a  competent  party  in  San  Francisco  against  a  shipment 
of  breadstuffs  to  Hamburg,  is  purchased  by  a  merchant  or 
banker  in  the  former  city  for  remittance  to  New  York  in  place 
of  a  corresponding  amount  of  coin.  The  New  York  merchant  or 
banker  credits  his  San  Francisco  customer  with  the  amount  as 
so  much  coin,  and  sells  the  bill  to  a  party  having  a  payment  to 
make  in  Manchester,  England.  From  Manchester  it  is  again 
purchased  for  remittance,  as  cash,  to  London.  From  London 
it  is  remitted  to  Paris,  whence  it  is  sent  for  collection  to  its 
place  of  payment.  In  the  mean  time,  it  has  served,  by  virtue 
of  what  it  represented,  in  the  hands  of  each  holder,  all  the  func- 
tions of  coin  which,  but  for  such  bill,  would  have  had  to  follow 
in  equal  amount,  in  its  track.  The  actual  price  at  which  the 
bill  would  be  taken,  in  the  place  of  coin,  at  the  several  places 
in  which  it  was  used,  would  be  greater  or  less  than  its  nominal 
value,  depending  upon  the  state  of  exchanges,  and  the  time  it 
had  to  run,  —  interest  being  always  charged,  or  deducted,  for 
such  time. 

Bills  of  exchange,  consequently,  serve  as  money  between 
communities  widely  separated,  for  the  reason  that  their  trans- 
fer operates  as  the  transfer  of  that  which  they  represent. 
It  is  plaui  to  see  that  their  use  is  the  only  mode  by  which  the 
value  of  exports  could  be  made  immediately  available.  Without 
them,  such  exports  Avould  be  so  much  dead  capital  till  they 
were  delivered  to  the  jjurchasers  or  consumers,  and  the  pro- 
ceeds of  the  same  collected  and  paid  over.  By  means  of  them, 
by  their  sale,  the  exporter  of  merchandise  can,  as  soon  as  they 
are  drawn,  convert  the  value  of  that  which  they  represent 
into  money.     A  currency  of  bills,  therefore,  is  in  a  normal  and 


14  THE    LAWS    OF    MONEY. 

healthy  condition  — is  perfectly  adapted  to  its  objects,  when 
every  shipment  has  its  proper  representative;  m  other  words, 
when  the  currency  of  commerce  equals  the  merchandise  of  com- 
merce, as  a  corresponding  amount  of  coin  or  bullion  is  thereby 
discharged  from  use.     There  could  be  no  inflation  so  long  as 
the  cur'I-ency  issued  was  symbolic,  as  it  would  always  be  re- 
tired when  the  merchandise  symbolized  was  delivered  for  con- 
sumption. M    J  • 
It  is  to  be  observed  that,  although  the  currency  described  is 
always  di-awn  payable  absolutely  in  coin,  and  usually  without 
referring  to  that  which  it  represents,  yet  it  is  always  under- 
stood that,  ordinarily,  httle  other  provision  is  made  for  its  pay- 
ment than  by  its  constituent.    It  is  a  currency  based,  not  upon 
coin  or  bullion,  but  upon  merchandise.    This  fact  is  so  obvious 
that  it  is  referred  to  here  only  ab  tending  to  illustrate  the  sub- 
ject of  local  currencies,  which  though  resting,  like  those  of 
bills,  on  merchandise  for  their  solvency,  are  removed  one  step 
farther  than  bills  from   that  wliich   they  represent,  and  are 
consequently  somewhat  more  difficult  of  explanation  than  a 
currency  in  the  form  of  bills. 

It  is  sufficiently  evident  that  bills  of  exchange  drawn  against 
the  sale  or  shipments  of  merchandise  in  gross,  are  not  adapted 
to  serve  as  local  currencies.  They  are  too  large  in  amount, 
and  are  not  as  a  rule  presently  due.  They  are  di-awn,  in  the- 
ory, upon  such  time  as  will  be  required  for  the  delivery  of  that 
which  they  represent  to  purchasers,  or  consumers,  and  the  col- 
lection of  their  proceeds.  Local  currencies  are  presently  due, 
because  the  merchandise  they  represent  is  always  assumed  to 
be  immediately  deliverable  to  the  consumer.  A  bill  of  ex- 
change, with  the  bill  of  lading  which  usually  accompanies  it, 
entitles  the  holder  to  the  possession  of  the  merchandise  repre- 
sented, or  to  the  proceeds  of  the  same.  He  has  the  right  of 
possession  to  the  specific  thing,  which  is  usually  sufficient  secu- 
rity against  loss.  For  whatever  may  be  sustained  he  has  the 
right  of  reclamation  upon  the  di'awer  as  soon  as  its  amount 
can  be  ascertained.  Local  currencies  —  notes  of  banks  —  do 
not  entitle  their  holder  to  receive  any  specific  article,  or  the 
proceeds  of  the  same,  corresponding  in  value.  If  the  holders 
of  merchandise  will  not  accept  them  on  its  sale  as  money,  then 
the  right  of  immediate  reclamation  must  exist  against  their 
makers  and  for  their  whole  amount. 


THE    LAWS   OF    MONEY.  15 

As  the  makers  of  bills,  wliich  serve  as  currency,  are  the 
producers  of  the  merchandise  which  such  bills  represent,  it 
would  seem  at  first  sight  that  they  could  supply  a  currency 
adapted  to  a  local  or  domestic  trade,  by  an  issue  of  notes  or 
certificates  of  various  denominations,  payable  on  demand  to 
bearer,  in  the  articles  which  they  produce  or  hold,  or  in  default 
thereof,  in  coin.  Should  all  producers  or  holders  of  mer- 
chandise issue  such  notes  or  certificates,  their  bearers  could 
hardly  fail,  either  by  presenting  them,  or  by  exchanging  them 
for  such  as  might  be  held  by  other  parties,  to  reach  any  article 
of  which  they  might  stand  in  need.  So  far  as  they  could  be 
so  used,  they  would  serve  all  the  purposes  of  a  currency  of 
coin.  The  fact,  however,  that  the  holders  of  such  notes  or 
certificates  would  be  subject  to  the  risk  of  the  continued  sol- 
vency of  their  makers,  who  would  as  a  rule  have  the  whole  of 
their  means  invested  in  their  various  industries,  would  so  dis- 
credit them  that  they  would  never  be  taken  in  any  consider- 
able amounts.  If,  however,  other  parties  not  subject  to  the 
risk  which  always  attends  production  and  trade,  and  possessed 
of  adequate  capital  either  in  coin,  or  merchandise  (the  equiva- 
lent in  value  of  coin,  and  in  demand  for  consumption ;)  or  in 
bills  given  for  such  merchandise  on  its  way  to  the  consumer ; 
should  issue  their  notes  or  certificates,  payable  on  demand,  to 
an  amount  equal  to  the  means  possessed  by  them  in  either 
form,  —  agreeing  to  hold  a  sufficient  amount  of  coin,  in  reserve, 
for  the  payment  of  any  reclamations  that  might  be  made,  they 
would  be  taken,  by  all  persons  desirous  of  becoming  pos- 
sessed of  the  merchandise  they  represented,  in  exchange  for 
what  they  had  to  sell,  as  readily  as  coin,  so  long  as  confidence 
was  felt  that  they  represented  that  which  they  purported 
to  represent.  The  sole  use  of  coin,  as  money,  is  to  reach 
some  other  article  of  property  of  equal  value.  If  it  can  be 
reached  more  conveniently  by  other  means  than  by  the  use  of 
coin,  that  of  the  latter  will,  of  course,  be  dispensed  with. 
The  most  convenient  methods  in  this,  as  in  all  transactions, 
will,  in  th'e  end,  always  have  the  preference. 

Almost  all  domestic  or  local  exchanges  are  now  effected  by 
the  use  of  notes  and  credits  issued  in  the  manner  described. 
The  makere  of  such  notes  are  usually  Banks,  and  associa- 
tions of  capitalists  ;  although  every  party  possessed  of  mer- 
chandise entering  into  consumption,  or  of  bills  of  parties  given 


16  THE    LAWS    OF    MONEY. 

for  such  merchandise,  is  entirely  competent  to  issue  instru- 
ments for  its  distribution.  The  modes  of  issue  of  the  notes  or 
credits  of  Banks,  and  the  conditions  necessary  to  secure  at  all 
times  their  return  without  the  withdrawal  of  any  considerable 
amount  of  the  reserves  held  to  meet  reclamations,  —  in  other 
words,  to  preserve  their  value  at  all  times  at  the  standard  of 
coin,  —  will  be  most  readily  shown  by  tracing  fi'om  the  outset 
the  operations  of  one  of  these  institutions. 

A  Bank  —  the  capital  of  which,  on  commencing  business,  may 
be  assumed  to  consist  of  one  million  dollars  paid  up  wholly  in 
coin,  does  not,  in  discounting  bills,  or  in  making  its  loans,  pay 
out  its  coin,  but  issues  its  notes,  or  gives  credit  on  its  books  to 
be  drawn  in  its  notes  or  in  coin,  at  the  pleasure  of  the  holder, 
and  which  till  drawn  are  termed  deposits  ;  holding,  in  the  mean 
time,  its  coin  as  a  reserve  to  redeem  such  notes  and  credits  as 
may  be  presented  for  payment.  If  it  paid  out  coin  in  making 
its  loans,  no  adequate  advantage  would  be  gained  to  its  stock- 
holders or  to  the  public  from  its  organization ;  for  coin  could 
be  loaned  as  well  without  as  with  a  Bank.  The  very  object  of 
the  Bank,  in  making  its  loans  in  the  manner  described,  is  to 
provide  instruments  of  exchange  and  distribution  other  than 
coin,  and  thereby  obviate  its  use.  It  is  here  assumed  that  the 
bills  to  be  discounted  were  given  for,  and  represent,  merchan- 
dise having  a  value  equal  to  their  nominal  amounts.  As  they 
would  be  paid  by  its  sale  and  the  collection  of  the  proceeds,  • 
they  would,  in  the  hands  of  their  holders,  have  a  correspond- 
ing value,  — a  value  equal  to  that  of  coin,  —  subject,  of  course, 
to  the  risks  which  attend  all  commercial  transactions.  The 
notes  and  credits  issued  would  have  a  shnilar  value,  as  the  Bank 
would  undertake  to  appropriate  the  proceeds  of  that  which  the 
bills  represented  for  their  payment.  The  process  of  discount 
consists  of  a  mutual  exchange  of  obligations.  As  those  of 
the  Bank  would  be  discharged  to  the  extent  that  its  notes  and 
credits  were  taken  in,  it  would  receive  them  in  payment  of  its 
bills  equally  with  coin.  The  holders  of  merchandise,  therefore, 
would  receive  them  equally  with  coin  in  its  sale,  as  they  would 
pay  their  bills  equally  with  coin.  As  they  would  be  accepted 
in  .the  sale  of  merchandise  equally  with  coin,  they  would  be 
taken  by  the  public,  the  consumers  of  merchandise,  equally 
with  coin.  As  the  object  of  all  currencies,  no  matter  the 
form  or  materials  of  which  they  may  be  composed,  is  to  reach 


THE    LAWS    OF    MONET.  17 

by  their  exchange  some  other  article  or  articles,  the  holders  of 
the  notes  and  credits  of  a  Bank  would  have  no  adequate  mo- 
tive to  exchange,  nor  woidd  they  exchange  them  for  coin,  to  be 
used  as  currency,  so  long  as  they  would  perform,  as  currency, 
all  the  functions  of  coin.  Producers,  consequently,  in  whose 
favor  the  bills  were  discounted,  would,  from  the  greater  con- 
venience of  their  use,  prefer  to  receive  in  their  discount,  notes 
and  credits  to  coin,  as  they  could  pay  them  out  equally  with 
coin  in  the  purchase  of  labor  and  material,  in  the  prosecution 
of  their  industries,  to  the  very  parties  who  would  be  the  con- 
sumers of  the  merchandise  which  they  had  produced  and  put 
upon  the  market.  As  fast  as  such  merchandise  was  consumed, 
the  notes  and  credits  issued  would  come  into  the  possession  of 
the  parties  who  had  been  its  holders  (the  makers  of  the  bills), 
to  be  used  by  them  in  their  payment.  The  obligation  created 
on  either  side,  when  the  bills  were  discounted,  woidd  in  this 
way  be  cancelled  by  mutual  offset ;  but  not  until  merchandise, 
equal  in  value,  had  been  fully  distributed  for  consumption. 

The  pivot  upon  which  all  these  operations  turn  is  merchan- 
dise. That  pro\dded,  the  instruments  which  represent  it,  and 
which  entitle  their  holder  to  a  corresponding  amount  of  the 
same  in  value,  or  to  the  proceeds  of  the  same,  and  which,  by 
their  transfer,  transfer  that  which  they  represent,  are  paper 
MONEY  —  Currency.  •  As  soon  as  they  are  issued,  their  move- 
ment commences  automatically  in  their  appropriate  spheres, 
and  continues  until  they  have  accomplished  their  circuit  and 
work.  It  is  merchandise  that  calls  them  into  being ;  it  is  mer- 
chandise that  gives  them  their  value ;  it  is  merchandise  that 
gives  them  their  impulse ;  and  it  is  merchandise  that,  by  its  pur- 
chase for  consumption,  returns  them  to  those  who  issue  them, 
not  to  be  reissued  but  in  the  making  of  new  loans.  So  far  as 
merchandise  is  provided,  they  proceed  noiselessly  and  benefi- 
cently in  their  proper  orbits.  So  far  as  it  is  not  provided,  their 
course  is  as  erratic  and  destructive  as  would  be  that  of  the 
planets,  without  the  guidance  and  control  of  that  central  mass 
around  which  they  now  so  harmoniously  move. 

All  local  currencies,  therefore,  are  based,  not  on  gold  and 
silver  coin,  but  on  merchandise,  for  which  they  serve,  in  the 
place  of  coin,  as  instruments  of  distribution.  Coin  is  itself 
money,  and  needs  no  sjnnbol  for  its  transfer  or  distribution. 
Except  a  small  quantity  by  way  of  change,  the  precious  metals 

2 


18  THE   LAWS    OF    MONEY. 

are  no  longer  used  as  currency.  They  are  held  and  used 
chiefly  as  reserves  for  the  discharge  of  such  paper  currencies 
as  are  not  discharged  by  merchandise  in  manner  described. 

As  the  Bank,  in  the  pajTnent  of  its  biUs,  would  make  no 
distinction  between  the  notes  and  credits  issued,  —  that  is,  as  it 
would  receive,  in  payment  of  bills  given  for  breadstuff, 
notes  and  credits  issued  in  the  discount  of  bills  given  for  iron, 
—  so  the  holders  of  merchandise,  who  would  be  the  makers  of  its 
bills,  would  receive  its  notes  and  credits  without  any  reference 
to  the  kind  of  merchandise  for  wliich  the  bills  discounted  were 
given.  In  the  same  way,  if  the  merchandise  of  a  community 
were  symbolized  by  the  issues  of  several  Banks,  such  issues 
would  be  received  on  the  same  terms  by  its  holders ;  for  the 
reason  that  each  Bank  would  receive  for  the  payment  of  its 
bills  the  notes  and  credits  of  the  other  Banks  (provided  they 
were  of  good  standing)  equally  with  its  own.  Whatever  the 
notes  or  credits,  therefore,  that  any  person  might  hold,  they 
would  be  directly  exchangeable  for  any  article  that  might  have 
been  symbolized,  or  which  he  might  wish  to  obtain.  In  the 
settlements  that  would  frequently,  and  in  places  where  there 
were  several  Banks  would  daily  be  made,  each  Bank  would 
have  to  take  in  all  its  notes  and  credits  that  might  be  held  by 
other  Banks.  These  settlements  would  be  made  by  offsetting, 
as  far  as  they  would  go,  the  notes  and  credits  of  other  Banks 
which  each  mifjht  hold  against  those  of  its  own  held  bv  them. 
The  balances  arising,  after  the  notes  and  credits  of  other  Banks 
held  by  any  one  Bank  had  been  exhausted  would,  like  all 
debts,  have  to  be  discharged  in  coin,  as  the  only  kind  of  capital 
which,  as  in  the  case  of  a  balance  arising  in  foreign  trade,  the 
party  would  accept  in  whose  favor  it  might  be  found,  or  which 
the  delinquent  would  have  to  offer. 

The  process  of  discount  consists,  as  already  shown,  of  a 
mutual  exchange  of  promises  payable  by  their  terms  in  coin,  — 
of  the  notes  and  credits  of  Banks  for  merchants'  bills.  The 
latter  are  payable,  in  theory,  upon  such  time  as  will  suffice  for 
the  distribution  of  the  merchandise  for  which  they  were  given, 
and  the  collection  of  its  proceeds.  The  former  are  payable 
presently,  as  they  are  assumed  to  represent  merchandise  fitted 
and  accessible  for  immediate  consumption  ;  and  in  order  that, 
if  their  holders  desire,  they  may  be  used  at  any  moment  in  the 


THE   LAWS   OF    MOXEV.  19 

purchase  of  the  same.  Thej  are  payalile  by  their  terms  in 
coin,  that  their  hoklers,  if  they  cannot  by  their  direct  exchange 
obtain  that  of  which  they  are  in  search,  may  at  once  convert 
them  into  that  form  of  merchandise,  gold  and  silver,  which 
have  at  all  times  the  same  value,  and  by  means  of  which  their 
holders  are  always  certain,  by  direct  exchange,  to  obtain  that 
which  they  wish  to  acquire  ;  or  which  they  can  safely  hold,  if 
they  do  not  wish  to  convert  them  immediately  into  merchan- 
dise. The  moment  they  are  converted  into  gold  and  silver, 
their  full  value  is  treasured  up  for  future  use,  placing  their 
holder  beyond  all  possible  risk  of  loss.  That  the  notes  and 
credits  of  a  Bank  will  not  be  received  for  merchandise  at  their 
nominal  value,  at  all  times,  is  evidence  that  they  have  been 
issued  upon  inadequate  security,  and  that  the  safety  of  their 
holder  requires  their  immediate  conversion  into  coin. 

As  Banks  guaranty  the  immediate  convertibility  of  their 
issues  into  merchandise  or  into  coin,  possessing  the  means 
therefor  either  in  their  reserves  in  coin  (which  all  Banks  must 
maintain),  or  in  the  merchandise  which  the  bills  they  have 
discounted  represent,  and  which,  whoever  may  have  its  posses- 
sion, is  to  be  esteemed  a  fund  especially  set  apart  for  their  pay- 
ment, and  consequently  for  the  redemption  of  the  notes  and 
credits  issued  in  their  discount,  they  treat  all  such  issues 
as  the  equivalent  of  coin ;  and  charge  the  same  rate  of 
interest  on  loans  made  bv  their  means,  that  thev  would  charge 
on  loans  of  an  equal  amount  of  coin.  The  borrowers  are  as- 
sumed to  be  producers ;  for  only  such  are  entitled  to  borrow  at 
Bank  by  an  issue  of  symbols,  which  anticipate  to  them  the  col- 
lection of  the  proceeds  of  merchandise  which  they  have  put 
upon  the  market.  The  interest  they  pay  in  the  discount  of  the 
bills  taken  in  its  sale  is  charged  to  the  purchasers,  and  is  finally 
paid  by  consumers  as  a  part  of  the  cost  of  distribution.  It 
properly  makes  an  element  in  price  ;  as,  without  the  symbols 
issued  by  the  Banks,  the  cost  of  distribution,  and  with  it,  price, 
would  be  greatly  increased,  by  the  use  of  a  metallic  in  place 
of  a  paper  currency.  Consumers  in  fact  are  the  parties  chiefly 
benefited  by  a  s}Tnbolic  currency,  as  the  object  and  effect  of 
all  such  currencies  are  to  simplify  and  cheapen  distribution. 
While  Banks  derive  a  profit  from  their  circulation,  they  can 
derive  one  only  so  long  as  they  conduct  their  operations  prop- 


20  THE   LAWS    OF   MONEY. 

erly,  and  in  harmony  with  the  general  welfare  ;  only  so  long 
as  they  issue  instruments  against  merchandise  actually  in  de- 
mand for  consumption.  The  return  to  them  of  their  notes  ^nd 
credits,  automatically,  is  the  proper  test,  and  the  only  one,  of 
competent  management. 

As-  the  liabilities  of  a  Bank  are  in  ratio  to  the  amount  of  its 
discounts,  and  as  it  must,  for  its  own  safety,  maintain  reserves 
to  take  in  such  of  its  liabilities  as  are  not  returned  to  it  in  the 
payment  of  its  bills,  it  follows  that  as  its  reserves  are  drawn,  it 
must  reduce  its  discounts, — in  other  words,  its  interest-bear- 
ing securities, — in  a  far  greater  degree.  If,  for  example,  a  Bank 
having  reserves  in  coin  equalling  $1,000,000  could  safely  have 
a  discount  line  of  15,000,000,  it  would,  if  its  reserves  were  re- 
duced to  $500,000,  have  to  reduce  its  discounts  to  $2,500,000. 
If  its  reserves  were  wholly  drawn,  the  Bank  would  have  to 
replenish  them,  or  suspend  operations  altogether. 

The  preceding  statement  fully  explains  the  effect  of  the 
addition  to,  or  the  withdrawal  from  the  reserves  of  Banks,  of  a 
comparatively  small  amount  of  specie.  In  countries  like  Great 
Britain  or  the  United  States  (the  currency  of  the  latter  being 
on  a  specie  basis),  nearly  all  additions  to  their  specie  go  imme- 
diately into  the  Banks,  increasing  their  reserves  in  an  equal 
degree.  These  immediately  proceed  to  increase  their  issues, 
somewhat  in  like  ratio.  So  long  as  they  discount  nothing  but 
legitimate  paper,  their  position  may  not  be  immediately  com- 
promised. All  sudden  additions  of  the  means  of  expenditure, 
however,  will  necessarily  lead  to  over-consumption,  to  wasteful- 
ness, and  to  enterprises  in  advance,  or  beyond  the  wants,  of 
the  community  in  which  they  are  undertaken.  On  the  other 
hand,  the  withdrawal  of  the  reserves  of  Banks,  provided  such 
withdrawal  be  permanent,  compels  them  to  reduce  their 
issues  in  five-fold  ratio  to  the  amount  of  such  withdrawal,  re- 
ducing the  available  means  of  the  public  in  a  like  degree. 
Their  operations  are  never  in  simple,  but  in  far  greater,  ratio 
to  the  amount  of  specie  they  hold ;  hence,  unless  they  are  ad- 
equately managed,  the  movements  of  specie  (which  is  always 
in  a  state  of  ebb  and  flow),  are  certain  to  keep  the  pubKc  in  a 
condition  of  chronic  excitement  and  agitation,  from  the  con- 
stant variations  in  the  amounts  of  paper  money.  At  one  time 
there  will  be  a  plethora  of  it ;  at  another  not  a  dollar  is  to  be 


THE    LAWS    OF    MONEY.  21 

had.  Banks,  therefore,  which  when  properly  conducted  are 
most  efficient  agents  in  promoting  the  public  welfare,  are,  when 
mismanaged,  the  greatest  of  curses.  Those  who  conduct  them 
should  early  learn  the  lesson  not  to  hasten  to  increase  their 
discounts,  for  the  reason  that  they  are  in  possession  of  an  un- 
usual amount  of  coin  ;  nor  to  refuse  them,  whenever  there  is  a 
slight  decrease  in  their  reserves.  They  ought  always  to  bear  in 
mind  that  such  additions  may  be  only  temporary,  and  that  loans 
made  upon  them  may  soon  have  to  be  taken  in.  They  may 
also  rest  assui-ed  that  so  long  as  their  loans  are  properly  made, 
all  coin  that  may  be  drawn  from  them  is  certain  to  be  speedily 
returned  by  the  necessary  operations  of  the  laws  of  trade. 

The  profits  of  a  Bank  are  in  the  ratio  that  its  interest-bear- 
ing securities  exceed  the  capital  required  in  its  operations, 
and  the  cost  of  management.  If  a  Bank,  for  example,  with 
81,000,000  of  capital,  — that  is,  with  $1,000,000  of  reserves  in 
the  form  of  coin,  —  discounts  bills  to  the  amount  of  $5,000,000, 
bearing  interest  at  the  rate  of  6  per  cent,  it  will  be  in  receipt 
of  an  annual  income  of  $300,000.  Out  of  this  it  has  to  deduct 
interest  on  its  reserves,  say  $60,000  ;  expense  of  management, 
$70,000;  losses  averaging,  say  $50,000  annually,  —  the  total 
being  $180,000.  The  amount  remaining  for  dividends  in  such 
a  case  would  equal  $120,000 ;  or  12  per  cent  annuall}'  on  the 
capital  employed.  The  above  figures  are,  of  course,  used  only 
by  way  of  illustration.  It  is  certain,  however,  that  the  profits 
of  well-conducted  Banks  exceed  considerably  the  ordinary 
rates  of  interest.  They  deal  with  capital  in  its  highest  and 
most  complete  form,  and  then-  profits  will  always  be  in  the 
same  form. 

It  is  often  asked,  "  If  the  borrowers  at  a  Bank  pay  interest 
on  the  whole  amount  of  its  loans,  that  is,  on  the  whole  amount 
of  notes  and  credits  issued,  —  what  is  the  advantage  of  such  a 
currency  over  one  of  coin,  —  of  capital?"  One  advantage  is 
the  greater  convenience  of  a  paper  over  a  metallic  currency ; 
a  convenience  often  so  great  that,  could  a  currency  of  coin  be 
furnished  without  charge,  borrowers  would  prefer  a  currency 
of  symbols  at  the  rates  ordinarily  paid  for  its  use.  A  person 
having  a  remittance  to  make  from  New  York  to  London  always 
prefers  a  bill  for  this  purpose,  from  the  safety  and  economy  of 


22 


THE  LAWS   OF  MONEY. 


its  transmission  over  that  of  coin.  In  local  currencies,  sym- 
bols are  preferable  to  coin  in  by  far  the  greater  number  of 
transactions.  Were  gold  and  silver  required  to  be  present  in 
all  exchanges,  the  amount  necessary  therefor,  provided  the 
volume  of  such  exchanges  remained  undiminished,  would  be 
more  than  ten-fold  greater  than  that  in  the  world.  As  they 
would  rise  in  price  from  the  increased  demand,  the  stimulus 
given  to  their  production  would  be  so  great  as  to  increase  their 
cost  probably  five-fold.  As  their  value  increased,  the  cost, 
risk,  and  inconvenience  attending  their  use  as  currency  would 
be  so  great  that  production  and  trade  would  be  reduced  some- 
what in  ratio  to  their  increase  in  cost.  With  such  increase  in 
cost,  the  value  of  all  articles  made  from  them,  whether  of  use 
or  ornament,  would  increase  in  like  ratio,  with  consequences 
most  detrimental  to  the  moral  as  well  as  the  physical  well- 
being  of  society  ;  for  the  cultivation  of  the  sense  and  love  of 
beauty,  to  which  the  precious  metals  so  largely  minister,  is 
among  the  most  powerful  means  of  promoting  the  well-beuig 
of  the  race. 


No  opinion  or  theory  is  more  generally  entertained  than 
that  the  effect  of  symbolic  currencies  is  to  raise  and  sustain 
prices.  Such  an  effect  is  constantly  urged  as  the  strongest 
argument  in  their  favor.  If  such  were  their  effect,  they  would 
be  the  greatest  of  evils,  instead  of  being,  as  they  are,  among 
the  most  beneficent  agents  in  promoting  the  general  welfare. 
Whatever  reduces  the  cost  of  distribution  must  reduce  prices, 
as  competition  is  always  certain  to  reduce  the  profits  of  produc- 
tion very  nearly  to  the  ordinary  rates  of  interest.  As  prices 
are  reduced,  however,  consumption  increases ;  so  that  the 
aggregate  amount  of  profits  of  a  manufacturer,  ft)r  example, 
may,  for  a  time,  be  largely  increased  from  increased  produc- 
tion, the  rate  of  profit  remaining  the  same  ;  or  his  aggregate 
profits  may  be  largely  increased,  the  rate  being  reduced,  by 
the  increased  amount  produced.  He  might  be  able  to  sell 
twenty-five  per  cent  cheaper  on  an  order  for  $100,000  of 
merchandise,  than  on  one  for  $10,000.  The  commerce  of  such  a 
country  as  the  United  States  has  resulted  in  a  great  measure 
from  a  reduction  in  the  cost  of  distribution.  Previous  to  the 
opening  of  the  Erie  Canal,  the  cost  of  transporting  a  ton  of 
wheat  from  Buffalo  to  the  city  of  New  York  equalled  $100. 


THE   LAWS   OF  MONEY.  23 

TJiat  article,  consequently,  throughout  the  greater  portion  of 
the  Mississippi  Valley,  had  no  exportable  value  whatever.    As 
the  people  living  in  it  could  not  export  their  products,  they 
could  nat  purchase  those  of  the  eastern  States.     The  construc- 
tion of  that  great  work  at  once  opened  a  market  to  an  immense 
area,  enabling  a  farmer  in  central  Ohio  to  sell  his  wheat  at  $1.00 
the  bushel,  or  at  three  times  its  former  price.     The  canal,  at 
the  same  time,  so  reduced  the  cost  of  transportation  that  he 
could  purchase  largely  of  the  fabrics  of  the  eastern  States, 
which  had,  from  cost  of  transportation  of  his  products,  been 
far  beyond  his  reach.     With  the  canal,  he  could  sell  at  higher 
and  buy  at  far  lower  rates.     So  with  the  eastern  manufact- 
urer.    Previous  to  the  opening  of  the  canal,  he  had  to  pay 
$3.00  the  bushel  for  Avheat.     That  work  reduced  the  price,  to 
him,  to  '$1.50.     At  the  same  time,  from  the  reduced  costs  of 
transportation,  new  and  extensive  markets  were  opened  for 
his  products.     He   could   sell  a  much  greater  amount  than 
formerly ;  and  probably,  at  the  outset,  at  equal  and  perhaps 
better   rates.       Both    farmer    and    manufacturer   were   thus 
mutually  and  equally  benefited,  but  the  benefit  was  mainly 
in  tlie  reduced  prices  at  which  each  could  purchase  the  prod- 
ucts of  the  other.     If  the  profits  of  each  on  the  sale  of  their 
own  products  were  increased,  say  ten  per  cent,  in  consequence 
of  the  reduction  in   the   cost   of  transportation  and   of  the 
markets  opened  by  the  canal,  each  would  pay,  say,  fifty  per 
cent  less  for  what  each  purchased  of  the  other.     If  in  the 
end,  the  rate  of  their  respective  profits  was  not  increased,  each 
would  make  a  very  large  saving  at  the  reduced  rate  at  wliich 
each  would  buy  the  products  of  the  other.    Canals  and  railroads 
supersede  the  old  highways,  for  the  reason  that  by  their  means 
merchandise  can  be  the  more  cheaply  and  conveniently  moved 
from  producer  to  consumer.     Symbolic  currencies  supersede 
metallic  ones  for  reasons  precisely  similar.     The  question  is 
the  relative  economy  of  the  two.     As  the  former  reduce  costs, 
they  must  reduce   price.     As  cost,  however,  is  reduced,  in- 
creased consumption  may  for  a  time  have  the  effect  of  increas- 
ing the  rate  of  profits  of  the  producer ;  but  such  effect  can  be 
only  temporary,  for  competition,  as   already  shown,  will   be 
certain  in  the  end  to  reduce  them  very  nearly  to  the  orduiary 
rates  of  interest. 


24  THE  LAWS   OF   MOXEY. 

It  follows,  from  what  has  preceded,  that  as  merchandise  can 
be  distributed  much  more  conveniently  and  at  much  less  cost 
by  a  currency  of  symbols  than  by  one  of  coin,  it  should,  so 
far  as  it  enters  into  consumption,  be  symbolized ;  or,  to  state 
the  matter  in  another  form,  —  as  a  certain  time   is   always 
required  for  distribution  of  merchandise  for  consumption,  all 
sales  in  gross  should  be  made  upon  a  corresponding  credit  as 
to  time,  in  order,  by  the  evidences  of  such  sale,  to  lay  the 
foundation  for  the  issue  of  cm-rency  as  the  instrument  of  its 
distribution.     A  currency  is  ideaUy  perfect  when  its  nominal 
value  equals  that  of  merchandise  to  be  distributed,  for  the 
reason  that  its  use  discharges  from  a  similar  one  an  equal 
amount  of  capital,  —  of  coin.     As  bills  of  exchange  anticipate, 
to  their  drawers,  the  value  of  that  which  they  represent,  so 
local  currencies  anticipate  to  producers  the  sale  and  collec- 
tion of  the  proceeds  of  that  which  they  have  put  upon  the 
market.     But  for  such  currencies,  if  they  carried   on   their 
mdustries  in  full  volume,  they  would  be  compelled  to  provide 
an  equal  additional  amount  of  capital,  either  by  accumulating 
or  borrowing  it.     Should  the  merchandise  entering  into  con- 
sumption be  symbolized  to  the  full  extent  of  every  dollar  of 
its   value,   there   could  be   no   inflation;  the   symbols   could 
never  exceed  the  value  of  that  entering  into  consumption, 
as  those  which  every  one  might  happen  to  hold  would  only 
equal  the  value  of  the  contribution  he  had  made  to  the  common 
stock,  and  as  they  would  be  returned  by  their  use  to  the  party 
issuing  them,  not  to  be  reissued  except  in  making  other  loans.^ 

1  Mr.  Inglis  Palgrave  in  his  "Notes  on  Banking  in  Great  Britain,"  estimates 
the  amount  of  Inland  Mercantile  Bills  made  in  each  quarter  of  1870-71,  to  equal 
£677,776,000.  The  average  time  in  which  they  were  drawn  was  a  little  less 
than  four  months.  He  estimates  the  amount  of  Foreign  Bills  drawn  on  Eng- 
land for  1871  to  equal  £507,400,000;  the  amount  of  Bills  drawn  in  England  on 
other  countries  to  equal  £73,500,000;  and  the  amount  of  Foreign  Bills  negotiated 
in  England  to  equal  £30,700,000 :  the  aggregate  of  such  Bills  being  £611,000,000. 
He  estimates  the  immediate  liabilities  of  the  Banks  and  Bankers  of  the  United 
Kingdom,  including  the  circulation  of  the  Bank  of  England,  —  that  is,  the  total 
paper  currency,  —  to  equal  £560,000,000.  Of  this  sum  only  about  £■43,000,000 
is  in  the  form  of  notes.  The  aggregate  of  note  circulation  was  made  up  as 
follows :  — 

Circulating  notes  of  Bank  of  England '  .  £24,000,000 

„  „      Private  and  Joint  Stock  Banks  about  .       6,000,000 

„  „      Scottish  Banks 6,100,000 

„  „      Irish  „  7,500,000 

£43,600,000 
The  amount  of  the  currency  in  the  form  of  deposits  exceeded  £500,000,000. 
As  the  currency  arises  from  the  discount  of  Bills,  and  as  the  Bills  in  existence 


THE  LAWS   OF  MONEY.  25 

As  already  remarked,  the  notes  and  credits  of  a  Bank,  so 
long  as  they  represented  merchandise,  would  serve  as  the 
instruments  of  its  distribution,  and  would  return  to  it,  auto- 
matically, in  the  payment  of  its  bills.  So  long,  consequently, 
would  its  reserves  remain  intact  in  its  vaults.  It  would,  how- 
ever, from  the  importunities  of  borrowers,  or  from  want  of 
proper  caution  in  making  its  loans,  be  constantly  liable  to  dis- 
count bills  wliich  either  did  not  represent  merchandise,  or 
which  did  not  represent  such  as  was  in  demand  for  consump- 
tion. To  an  equal  extent  it  would  have  to  j3ay  out,  in  the 
redemption  of  its  notes  and  credits,  a  corresponding  amount  of 
coin.  It  would  not  unfrequently  turn  out  that  bills  aj)par- 
entlj  the  most  legitimate  would  not  be  paid  from  causes  which 
could  not  have  been  foreseen,  or  which  could  not  have  been 
avoided.  It  is  to  meet  such  contingencies  or  unforeseen  calls 
that  every  Bank  must,  as  already  shown,  retain  reserves  itt 
coin ;  and  in  value,  it  is  here  assumed,  equal  at  least  to  twenty 
per  cent  of  its  liabilities :  that  is,  with  $5,000,000  of  notes 
and  credits  outstanding,  it  should  maintain  in  its  vaults  at  least 
$1,000,000  in  coin.  This  coin,  in  fact,  is  the  fund  or  capital 
which  is  to  guaranty  its  undertaking  that  all  its  issues  shall 
have  a  function  or  value  equal  to  that  of  coin.  They  would 
have,  as  already  shown,  an  equal  value,  provided  the  bills,  in 
the  discount  of  which  they  were  issued,  represented  merchan- 
dise entering  into  consumption,  and  having  a  value  in  coin 
equal  to  their  nominal  amount.  So  long  as  they  represented 
such  .values,  there  woidd  be  no  adequate  motive  to  draw  them 
in  coin.  So  far  as  they  did  not  represent  such  merchandise,  they 
would  be  speedily  drawn  in  coin.  Suppose  a  Bank,  with  reserves 
in  coin  of  $1,000,000,  to  discount  ninety-day  bills  given  for 
merchandise  to  the  amount  of  -$5,000,000  ;  and,  thereafter,  to 
discount  additional  bills  having  three  years  to  run,  to  the 
amount  of  $1,000,000 :  all  the  notes  and  credits  issued  would 
be  returned  to  it  at  the  same  time.  Those  issued  m  the 
discount  of  the  bills  given  for  merchandise,  would  be  returned 
to  it   in  their  payment.     To  take  in  the  notes  and  credits 

at  any  one  time  are  wholly  retired  witliin  periods  of  four  months,  the  wliole 
amount  of  currency  afloat  is  wholly  retired  three  times  each  year, — its  place 
being  supplied  by  new  issues  in  the  discount  of  new  Bills.  Both  Bills  and  cur- 
rency are  simply  a  record  of  the  movement  of  merchandise,  and  are  retired  by 
its  consumption. 


26  THE  LAWS   OF  MOXEY. 

issued  in  the  discount  of  the  three-year  biUs,  the  Bank  would 
have  to  pay  out  a  corresponding  amount  of  specie ;  that  is,  the 
whole  of  its  reserves,  —  its  cash  capital.  Its  means  or  assets 
would  then  consist  of  bHls  having  two  years  and  nine  months 
to  run.  Such  bills  might  be  valuable,  and  by  their  conversion 
into  coin  might,  in  the  end,  provide  new  reserves  ;  but  till  they 
were  provided  from  such,  or  from  some  other  source,  the  Bank 
would  have  to  suspend  operations  altogether ;  for  the  moment 
it  was  understood  that  it  was  without  reserves  or  means  to 
make  good  the  losses  which  it  was  hkely  to  sustain,  no  one 
would  exchange  good  bills  for  its  notes  and  credits.  It  would 
be  regarded  as  in  the  light  of  a  merchant,  who  not  only  re- 
quired credit  for  the  goods  purchased,  but  for  liis  rents,  and 
for  the  ordmary  expenses  incurred  by  him  in  the  prosecution 
of  his  business. 

'  The  bills  of  a  Bank,  so  long  as  they  represent  merchandise 
having  a  value  in  coin  equal  to  their  nominal  amount,  will  not 
only  return  to  it  the  notes  and  credits  issued  in  their  discount, 
but  they  will  provide  for  the  return  to  it  of  such  portion  of  its 
reserves  as  may,  from  whatever  cause,  have  been  drawn.  If 
they  equalled  $1,000,000,  and  one  half  be  drawn  on  an  equal 
amount  of  notes  and  credits,  an  equal  amount  of  its  bills,  for 
the  want  of  a  corresponding  amount  of  currency,  would  have 
to  be  paid  in  com.  A  Bank,  however,  as  a  rule,  has  nothing 
to  fear  so  longj  as  the  makers  of  its  bills  are  solvent.  Of 
course,  I  am  not  speaking  of  periods  in  which  confidence  is  so 
far  shaken  that  the  holders  of  the  notes  and  credits  demand 
the  specie  for  their  own  real  or  fancied  security.  In  such  case, 
the  Bank  must  suspend ;  as  its  own  liabilities  are  payable  on 
demand,  while  the  greater  part  of  those  of  the  public  to  it  are 
payable  at  a  future  day.  A  Bank,  to  be  always  prepared  to 
take  in  instantly  all  its  liabilities,  would  be  compelled  to  main- 
tain on  hand,  at  aU  times,  coin  equal  to  their  whole  amount. 
In  such  case,  no  motive  would  exist  for  its  organization,  and  no 
provision  would  be  made  for  the  distribution  of  merchandise 
by  any  currency  but  one  of  coin.  No  pro\'ision  can  be  made 
by  a  Bank  of  issue  for  the  instant  discharge  of  all  its  liabili- 
ties ;  and  there  is  no  necessity  for  such  provision,  so  long 
as  it  conducts  its  business  properly,  —  that  is,  so  long  as  its 
bills  represent  that  kind  of  merchandise  which  will  give  proper 
employment,  in  its  distribution,   to   the   currency  it  issues. 


THE  LAWS   OF   MONEY.  27 

Sucli  merchandise  must  be  reached  and  utiKzed  by  means  of  a 
currency  of  some  kind ;  and  one  of  notes  and  credits  will  be 
preferred  for  this  purpose,  so  long  as  it  will  secure  to  their 
holders  the  same  amount  of  merchandise  as  an  equal  amount 
of  a  currency  of  coin. 

As  a  rule,  therefore,  a  Bank  has  little  to  fear  from  the  with- 
drawal of  its  reserves,  so  long  as  its  bills  represent  an  adequate 
value  of  merchandise.  It  can,  however,  never  be  sufficiently 
informed  upon  this  point.  In  case  of  a  demand  for  coin,  it 
should,  as  a  matter  of  precaution,  immediately  reduce  its  line 
of  discounts.  The  payment  of  its  bills,  which  must  continue, 
would  not  only  take  in  its  liabilities,  but  would  contract  the 
volume  of  currency  to  an  equal  degree.  Money  would  at  once 
be  in  active  demand ;  rates  of  interest  would  be  advanced ;  ille- 
gitimate operations  of  all  kinds  would  be  checked :  and,  if  the 
latter  were  the  cause  of  demand  for  specie,  the  proper  remedy 
would  be  immediately  applied,  and  the  currency  rendered  so 
far  symbolic  that  an  excessive  demand  for  coin  would  soon 
cease.  A  return  flow  would  be  certain  to  set  in,  and  would 
soon  bring  back  to  the  Bank  all  the  specie  drawn  from  it,  and 
perhaps  a  much  larger  amount  from  the  liquidations  resulting 
from  the  disturbances  which  had  been  created. 

For  a  considerable  time  after  Banks  were  established,  the 
currency  issued  by  them  consisted  chiefly  of  their  notes,  for  the 
reason  that  borrowers,  kept  theh*  money  in  their  own  strong 
boxes,  in  their  places  of  business.  As  the  inconvenience  and 
risk  of  loss  attending  the  use  and  care  of  notes  would  be  simi- 
lar in  kind,  if  not  equal  in  degree,  to  that  attending  the  use 
and  care  of  coin,  borrowers,  for  their  greater  convenience  and 
safety,  would  gradually  come  into  the  habit  of  leaving  undrawn 
and  on  deposit,  such  portions  of  their  loans  as  were  not  re- 
quired for  immediate  use.  Other  parties  coming  into  posses- 
sion of  notes  beyond  their  immediate  wants  would,  for  similar 
reasons,  deposit  them  in  Bank,  to  be  drawn  or  transferred  at 
pleasure  by  checks.  The  Banks  in  this  way  would  not  only 
become  the  holders  of  reserves  of  parties  engaged  in  industrial 
operations,  (for  the  latter  must,  equally  with  Banks,  maintain 
reserves  bearing  a  certain  ratio  to  their  liabilities),  but  of  the 
unemployed  money,  whether  coin  or  currency,  of  the  community 
in  which  they  were  situated.     To  the  extent  of  the  deposits 


28  THE  LAWS   OF  MONEY. 

representing  the  proceeds  of  undrawn  loans,  or  of  the  proceeds 
of  such  as  had  been  drawn  and  returned  to  it,  and  which  were 
likely  to  remain  undrawn,  a  corresponding  amount  of  merchan- 
dise would  be  without  the  appropriate  means  for  distribution, 
and  for  such  want  would  be  unavailable  both  to  the  producers 
and  the  public.     In   a  community  in  which  the   notes   and 
credits  of  Banks   had  been  used   as  currency,  the   precious 
metals  could  not  be  immediately  provided  to  make  good  the 
sudden  withdrawal  of  the  former.     They  could  only  be  pro- 
vided by  a  sale  of  merchandise,  which  in  the  case  supposed,  for 
want  of  currency  in  some  form,  might  be  impossible.     In  ratio 
therefore,  as  the  proceeds  of  loans  were  not  drawn,  or  as  the 
notes  issued  were  returned  to  them  on  deposit,  the  Banks  could 
discount  new  bills  in  manner  described.    The  notes  and  credits 
issued  in  the  discount  of  new  bills  would  be  used  in  the  pay- 
ment of  the  old  ones  first  falling  due  ;   and,  as  these  again 
returned  to  the  Banks,  they  would  again  be  reissued,  so  that 
the  currency  at   all   times  would   tend   to   approximate   the 
amount  of  merchandise  entering  into  consumption.    The  Banks 
could  therefore  increase  their  loans,  and  with  them  their  in- 
terest-bearing securities,  and  their  profits,  in  ratio  to  the  amount 
of  their  deposits  that  were  likely  to  be  permanent.     These,  in 
fact,  would  represent  a  corresponding  amount  of  capital  for 
which  its  owners,  the  depositors,  had  no  immediate  use,  and  of 
which,  until  wanted  by  them,  they  would  allow  the  Banks  to 
have  the  benefit.    The  amount  so  held  in  such  countries  as  the 
United  States  and  Great  Britain  is  enormous,  as  every  indi- 
vidual, no  matter  how  small  his  means,  will  always  seek  to  hold 
a  portion  of  them  in  reserve,  and  as  reserves  must  be  held, 
and  permanently,  by  all  parties  engaged  in  industrial  and  com- 
mercial operations  in  ratio  to  their  magnitude.     In  this  way, 
through  the  action  of  the  Banks,  all  the  capital  of  a  community 
imemployed  by  its  owners,  and  proper  to  be  spnbolized,  is  ren- 
dered available  for  consumption  and  production.     In  no  other 
way  than  that  described  could  it  be  made  available.     At  the 
same  time,  but  for  the  use  by  the  Banks  of  the  capital  for  which 
its  owners  had  no  immediate  use,  there  could  be  no  adequate 
motive  to  their  establishment ;  as  they  could  not  on  loans  of 
their  own  means,  their  expenses  being  deducted,  make  a  profit 
equal  to  the  ordinary  rates  of  interest. 

From  what  has  preceded,  it  will  be  seen  that  there  is  no  dif- 


THE  LAWS   OF   MONEY.  29 

ference  whatever,  but  in  form,  between  notes  and  checks  as 
currency.  Each  (except  deposits  made  in  coin)  springs  from 
similar  transactions,  —  tlie  discount  of  bills.  It  always  lies 
with  the  party  in  whose  favor  loans  are  made  to  say  in  what 
form  he  will  avail  himself  of  their  proceeds,  —  whether  in  the 
notes  of  a  Bank,  or  in  credits  on  its  books  to  be  transferred  by 
checks,  or  to  be  drawn  by  means  of  them  in  notes  or  coin.  As 
notes  and  credits  in  the  form  of  deposits  arise  from  similar 
transactions,  and  as  they  are  convertible  the  one  into  the 
other,  and  each  equally  into  coin,  at  the  pleasure  of  the  holder 
or  owner,  the  absolute  identity  of  the  two,  in  principle,  is  a 
matter  of  demonstration,  —  for  "  two  things  that  equal  a  third 
equal  each  other."  Writers,  however,  upon  the  subject  of 
currency  have  without  exception,  I  believe,  made  a  radical 
distinction  between  notes  and  checks.  Such  a  distinction,  , 
although  utterly  and  wholly  fanciful,  has  been  one  of  the  chief 
reasons  why  so  little  progress  has  been  made  in  taking  the  sub- 
ject of  money  out  of  the  category  of  dialectics,  and  out  of  the 
methods  of  Schoolmen,  and  in  subjecting  it  to  that  process  of 
scientific  analysis,  without  wluch  it  is  impossible  that  any  con- 
siderable progress  in  its  solution  should  be  made. 

All  modern  Banks,  therefore,  are  equally  Banks  of  circula- 
tion whatever  the  form  in  which  their  loans  are  made.  The 
tendency  of  checks  to  supersede  notes  arises  simply  from  the 
greater  convenience  and  safety  of  their  use.  They  not  only 
avoid  the  possibility  of  loss,  but  they  are  often  of  great  value 
in  serving  as  records  of  the  character  or  nature  of  the  trans- 
actions in  which  they  are  used. 

It  has  already  been  shown  that  division  of  labor  is  not  only 
the  condition  .of  all  accumulations  worthy  of  the  name,  but  of 
all  excellence  in  the  articles  produced.  Not  only  may  a  single 
article  pass  through  a  dozen  different  hands  before  it  is  fitted  for 
the  market,  but  it  may  pass  through  as  many  more  after  it  has 
received  its  final  touch,  before  it  reaches  the  consumer.  Division 
of  labor,  consequently,  is  just  as  important,  and  may  be  carried 
to  an  equal  extent,  in  distribution  as  in  production.  It  is  not 
for  the  interest  of  the  producer  or  of  the  public,  that  he  should 
attempt  the  distribution  of  his  products.  All  liis  capital  and 
all  his  attention  and  skill  should  be  devoted  to  two  objects,  — 
economy  of  production  and  excellence  in  quality.     He  cannot 


30  THE   LAWS    OF   MONEY. 

go  in  search  of  the  consumers,  or  of  those  who  purchase  for  the 
retail  trade ;  nor  can  he  spare  the  time  necessary  to  ascertain 
their  means  or  wants.     All  such  matters  are  properly  left  to 
anotherclass  — to  merchants  — who  have  functions  in  distri- 
bution as  distinct  and  important  as  are  those  of  the  manufact- 
urer in  production.     The  latter,  producing  perhaps  only  one 
article,  if  he  undertook  its  distribution  might  have  to  wait  days 
or  weeks  before  he  could  find  a  party  in  want  of  it.     Such 
operations  would  be  simply  barter.   The  merchant,  on  the  other 
hand,  has  the  goods  of  all  producers  in  his  stock,  and  can 
supply  the  want  of  all  apphcants.     He  is  in  position  to  know 
their  wants,  and  can  keep  producers  equally  informed  with  him- 
self.    But  for  the  merchant,  —  who  by  his  purchases  notifies  . 
them  of  the  condition  of  the  markets,  of  the  styles  and  kinds 
of  goods  in  demand,  producers  would  be  without  any  adequate 
guide  whatever,  and  by  an  unwise  direction  of  their  industries 
might  wholly  ruin  themselves  in  the  course  of  a  very  few  days 
or  weeks.     So,  wholesale  merchants  sell  very  largely  through 
brokers,  who  look  up  customers,  and  ascertain  their  wants  and 
means.     The  greater  the  division  of  labor  in  distribution,  the 
more  economically  is  it  accompUshed.     The  amount  saved  is 
so  much  deducted  from  the  price  to  be  paid  by  consumers,  who 
reap  nearly  all  the  advantages  resulting  from  decreased  cost 
either  of  production  or  distribution. 

As  all  banking  currencies  are  instruments  arising  out  of,  or 
in,  the  sale  and  distribution  to  consumers  of  merchandise 
it  may  happen  that  several  sets  of  s}Tnbols  ilsued  against 
the  same  merchandise  may  be  in  existence  at  the  same  time. 
Suppose  the  bills  of  a  New  York  merchant,  given  in  the  purchase 
of  1,000  bales  of  cotton,  to  be  discounted  by  the  issue  of  currency 
equal  to  its  value.  The  merchant  may  presently  sell  the  same 
cotton,  taking  the  bills  of  a  manufacturer  therefor.  These  he 
may  procure  to  be  discounted.  In  this  way,  a  currency  may 
be  created  equalling  twice  or  thrice  the  value  of  the  merchan- 
dise upon  wliich  it  is  based.  In  such  cases,  however,  only  an 
amount  of  the  currency  equalling  the  value  of  the  cotton  first 
sold  will,  as  a  rule,  enter  into  circulation.  The  first  seller,  the 
producer,  may  draw  from  the  Bank  which  discounted  the  bills 
given  for  his  crop  the  whole  amount  of  their  proceeds.  The 
merchant  who  procured  the  discount  of  the  second  set  of  bills 


THE    LAWS    OF    MONEY.  31 

will,  as  a  rule,  hold  tlieir  proceeds  on  deposit  to  meet  the  bills 
given  by  him.  The  deposits  growing  out  of  such  bills  do  not 
become  currency,  nor  do  they  act  upon  prices  unless  the  Bank 
makes  loans  upon  them  in  the  manner  described.  In  periods  of 
great  confidence,  or  when  a  speculative  feeling  prevails,  de- 
posits, no  matter  how  they  may  have  arisen,  may  be  loaned 
upon  to  an  extent  to  create  an  excess  of  currency,  —  that  is,  a 
currency  which  has  no  adequate  constituent,  —  a  currency  that 
is  duplicated  upon  the  same  merchandise.  The  temptations 
to  make  loans  upon  deposits,  which  may  not  represent  loanable 
capital,  is  a  sufficient  reason  why  Banks  should  never  allow 
interest  upon  them.  If  interest  be  allowed,  loans  must  be 
made  upon  them  to  save  Banks  from  loss.  If  they  do  not 
represent  loanable  capital,  such  loans  inflate  the  currency  in 
an  equal  degree,  for  which  in  the  end  the  Banks  must  pay  the 
appropriate  penalty,  in  the  loss,  as  will  hereafter  be  shown,  of 
a  corresponding  amount  of  their  reserves. 

A  wide  distinction  is  always  to  be  made  between  capitalists 
and  parties  engaged  in  the  active  operations  of  production  and 
trade.  The  former  seek  to  part  'with  —  to  invest  —  their 
capital  for  the  income  or  interest  it  will  yield.  The  latter 
must  always  have  their  capital  in  hand  for  the  prosecution  of 
their  various  avocations.  To  part  with  it  is  to  give  up  business 
altogether.  In  this  respect  Banks,  bankers,  manufacturers, 
and  merchants,  — in  fact  all  engaged  in  production  and  distri- 
bution, —  are  similarly  placed.  Each  has  his  proper  function  or 
department  in  the  great  co-partnership  which  embraces  every 
employment  and  ever}^  pursuit.  The  capital  which  each  is 
required  to  possess  is  that  necessary  to  carry  forward  his 
particular  business  or  calling,  and  to  meet  the  losses  likely  to 
be  incurred.  A  commission  merchant,  althousrh  he  mav  become 
responsible  for  all  the  merchandise  passing  through  his  hands, 
has  only  a  qualified  interest  in  it.  He  may  with  a  capital  of 
^100,000  be  turning  merchandise  and  incurring  liabilities  to  the 
amount  of  81,000,000,  or  ten  times  greater  than  his  whole  means. 
There  is  no  more  propriety  in  his  paying  cash  for  the  merchan- 
dise he  distributes,  than  that  the  railroad  should  own  the  mer- 
chandise it  transports.  All  that  is  requu'ed  of  either,  by  way  of 
capital,  is  an  amount  necessary  to  carry  on  their  operations 
including  the  losses  they  may  suffer.     The  means  for  the  pay- 


32  THE    LAWS    OF    MOKEY. 

ment  by  the  merchant  of  his  bills,  or  the  greater  part  of  them, 
must  be  provided  by  the  sale  of  the  merchandise  for  which 
they  were  given.  So  with  Banks.  They  deal  in  bills  given 
for  merchandise,  not  by  paying  out  their  capital,  but  by  issuing 
their  own  obligations.  Their  capitals  are  the  reserves  which 
are  always  to  be  held  to  meet  losses  and  extraordinary  calls, 
and  are  never  to  be  permanently  parted  with.  If  made  the 
basis  of  loans,  they  would  have  to  discharge  the  notes  and 
credits  that  were  issued  against  them.  If  they  are  drawn  to 
any  considerable  extent,  their  loss  must  immediately  be  made 
good,  or  the  Banks  must  reduce  their  operations  so  that  there 
may  be  a  proper  relation  between  their  liabilities  and  their 
cash  means.  Every  person  and  every  institution  engaged  in 
production  and  distribution  seek  not  only  to  retain  their  cap- 
ital but  to  increase  it  to  the  utmost  extent,  as  they  can  enlarge 
their  operations,  not  in  simple  but  in  geometric  ratio,  to  the 
means  they  possess, — increasing  their  profits  in  like  ratio; 
for  their  profits  are  not  so  much  made  upon  the  capital  they 
may  own,  as  uj)on  the  whole  volume  of  their  transactions. 

It  will  be  observed  that  while  the  reserves  of  Banks  must  be 
in  the  form  of  coin,  the  reserves  of  the  public  may  be  in  the 
currency  issued  by  them.  As  the  former  undertake  to  supply 
currency,  they  must  supply  it  in  whatever  form  it  may  be 
required. 

Although  a  Bank  must  always  maintain  reserves  in  coin 
bearing  a  certain  ratio  to  its  liabilities,  it  may  commence 
operations  with  its  capital  paid  in  almost  wholly  in  bills.  It  is 
usually  so  paid,  or  in  checks  upon  other  Banks.  The  merchan- 
dise represented  by  the  new  bills  discounted  would  give  full 
employment  to  the  notes  and  credits  that  might  be  issued, 
while  the  payment  which  could  be  demanded,  in  coin,  of  those 
which  constituted  its  capital,  would  supply  all  the  reserves  that 
might  be  required.  The  amount  collected  for  this  purpose 
might  be  all  the  capital,  in  the  form  of  coin  or  merchandise, 
ever  in  its  actual  possession,  till  its  affairs  were  wound  up.  In 
such  case,  its  whole  capital  might  be  returned  to  it  in  coin.  Its 
capital  represented  by  its  bills,  less  the  amount  collected  in 
coin  to  serve  as  reserves,  would  remain  in  the  hands  of  its 
borrowers,  and  at  interest,  pending  and  after  its  organization, 
as  before.     As  the  possession  of  capital  is  always  assumed  to 


THE   LAWS    OF   MONET.  33 

carr}'  with  it  an  obligation  to  pay  interest,  every  person  and 
every  institution,  Banks  especially,  always  seek  to  hold  as  little 
as  possible,  in  order  to  have  as  much  out  at  interest  as  possible. 

As  the  capital  of  a  Bank,  less  its  reserves,  would  always  re- 
main in  the  hands  of  the  public,  it  would  be  constantly  moving 
from  one  producer  to  another,  and  be  constantly  taking  new 
forms.  Suppose  a  bill,  which  made  up  a  portion  of  its  capital, 
to  represent  1,000  barrels  of  flour.  The  notes  and  credits  issued 
against  it,  which  in  this  instance  would  be  the  discount  by  the 
Bank  of  its  own  bill,  might  be  used  in  the  purchase,  for  con- 
sumption, of  this  flour,  which  would  speedily  reappear  in 
other  forms  of  merchandise  —  say  cotton  goods  —  wliich  would 
soon  be  represented  by  bills,  to  be  discounted  in  manner 
described,  their  constituent  to  reappear,  like  the  flour,  in 
some  other  form.  In  tliis  way,  the  capital  of  the  Banks  rep- 
resented by  bills  is  constantly  employed  in  the  various  indus- 
trial operations  of  the  community,  and  is  constantly  changing 
hands  and  taking  new  forms.  Its  return  to  the  Banks  in  the 
form  of  coin  —  and  it  must  be  returned  in  this  form,  if  at  all  — 
would  be  evidence  of  such  a  cessation  of  demand  for  mer- 
chandise, or  such  a  disturbance  of  industries,  that  it  could  not 
be  profitably  employed,  —  that  borrowers  could  no  longer  afford 
to  pay  interest  for  its  use. 

Currency,  in  whatever  form,  is  the  instrument  of  expenditure. 
The  degree  of  the  latter,  as  a  rule,  is  always  in  ratio  to  the 
amount  of  the  former.  From  the  credit  attached,  and  very 
properly,  to  currencies,  they  are  usually  received,  on  their 
*  issue,  at  their  nominal  value  in  coin.  So  far,  however,  as  they 
were  not  symbolic,  —  that  is,  so  far  as  they  did  not  represent  mer- 
chandise, the  instruments  of  expenditure  would  be  in  excess  of 
the  means,  and  an  inflation  of  prices  would  be  the  necessary 
result.  If,  for  example,  the  products  of  a  community  entering 
constantly  into  consumption  equalled  850,000,000,  and  if  such 
products  Avere  represented  by  an  issue  of  notes  and  credits  — 
of  currency —  to  an  equal  amount,  business  would  remain,  as  far 
as  the  currency  was  concerned,  in  a  normal  and  healthy  condi- 
tion. The  reserves  in  coin  maintained  in  such  case  would  equal, 
say,  $10,000,000.  Suppose  the  Banks  to  increase  their  loans  and 
issues  to  $60,000,000  by  discounting,  in  addition  to  bills  rep- 

3 


S4i  THE   LAWS    OF   MONEY. 

resenting  merchandise,  accommodation  bills  to  the  amount  of 
$10,000,000.  The  excess  of  issue,  if  confidence  were  felt  in  it, 
would  be  as  readily  accepted  by  the  parties  to  whom  it  might 
be  paid,  and  by  the  holders  of  merchandise,  as  that  wliich  was 
symbolic.  As  there  would  in  the  mean  time  be  no  correspond- 
ing increase  of  merchandise,  prices  would  rise  in  ratio  to  the 
increase  of  the  instruments  of  expenditure.  That  already  pro- 
duced, the  proper  subjects  of  consumption  and  which  would 
have  sufficed  for  five  months,  will  now  suffice  for  onl}'  four. 
To  meet  the  increased  demand,  additional  importations  would 
be  made,  and  an  unhealthy  stimulus  given  to  production  of 
all  kinds.  New  schemes  would  be  set  on  foot  involving  large 
outlays,  but  being  uncalled  for  by  any  permanent  ability  to 
consume  their  products,  would  rest  upon  no  solid  foundation  ; 
while  extravagance  and  thriftlessness  would  be  encouraged 
just  in  ratio  as  the  instruments  of  expenditure  were  to  be  had 
without  labor,  or  without  any  adequate  consideration  being 
given  therefor. - 

For  a  time,  every  thing  would  wear  the  appearance  of  great 
prosperity.  All  who  might  happen  to  have  merchandise  would, 
by  its  rise,  become  suddenly  rich.  But  when  the  accommoda- 
tion bills  matured,  their  makers  would  have  nothing  to  pay 
with.  These  were  made,  not  in  the  purchase  of  merchandise 
for  its  distribution  to  consumers,  but  for  the  purpose  of  sup- 
plying it  to  their  makers  for  consumption.  The  holders  of  that 
which  had  been  produced  would,  from  its  rise  in  price,  come  into 
possession  of  the  whole  or  the  greater  part  of  the  currency  which 
had  been  issued  upon  accommodation,  as  well  as  upon  com- 
mercial bills.  Upon  the  maturity  of  their  own  they  would, 
consequently,  be  creditors  of  the  Banks  to  the  amount  of 
$10,000,000  of  notes  and  credits  in  excess  of  the  sums  due  on 
tlieir  bills,  —  that  is,  to  the  whole  amount  issued  on  the  accom- 
modation paper,  —  and  would  draw  the  amount  in  coin,  as 
balances  due  them.  If  the  Banks,  in  discounting  the  accom- 
modation bills,  had  increased  their  reserves  in  ratio  of  one  of 
coin  to  five  of  liabilities,  the}^  would,  after  the  notes  and  credits 
issued  in  discounting  such  paper  had  been  taken  in,  have  only 
$2,000,000  of  coin  reserves  left.  In  such  case,  they  would  be 
compelled  to  reduce  the  line  of  their  discounts  to  $10,000,000 ; 
or  they  would  have  to  provide  new  reserves  to  the  amount  of 
$3,000,000  in  order  to  supply  to  the  public  its  accustomed 


THE    LA^S    OF    MONEY.  35 

amount  of  currency.  Till  these  were  provided,  they  could  not 
make  loans  exceeding  $10,000,000  in  amount  (their  reserves 
being  only  12,000,000),  in  place  of  the  $60,000,000  in  circula- 
tion previous  to  the  taking  in  of  the  notes  and  credits  issued 
in  the  discount  of  the  accommodation  bills.  For  a  time,  there- 
fore, the  community  would  be  almost  wholly  without  the  instru- 
ments or  means  for  effecting  their  exchanges.  Production  and 
trade  would  be  brought  instantly  to  a  complete  stand-still.  No 
debts  of  any  kind  could  be  paid.  In  the  excitement  and  panic 
that  would  be  certain  to  follow,  a  run  would  be  immediately 
made  upon  the  Banks  for  the  $2,000,000  of  reserves  still  re- 
maining in  their  vaults.  Their  immediate  suspension  would 
be  the  necessary  result. 

The  condition  of  affairs,  in  the  case  supposed,  would  be 
greatly  aggravated  for  the  reason  that,  with  the  increase  of 
currency  from  $50,000,000  to  $60,000,000,  prices  would  not 
only  have  been  greatly  inflated,  but  production  greatly  stimu- 
lated at  a  correspondingly  high  cost.  When  the  reverse 
came,  those  who  had  conducted  their  operations  in  the  most 
careful  manner,  if  they  had  continued  them  at  all,  would  be  as 
fatally  involved  as  the  most  improvident  and  reckless.  Mer- 
chandise which  had  been  produced  at  even  ordinary  rates 
could  not  be  sold  at  any  price  ;  so  that  the  bills  of  the  Bank, 
which  were  considered  as  perfectly  safe  and  legitimate  when 
taken,  would  be  almost  as  valueless  as  the  accommodation  bills, 
the  discount  of  which  had  produced  all  the  ruin  and  bank- 
ruptcy described. 

It  may  be  asked,  "  Will  not  the  parties  who,  in  the  case 
supposed,  drew  the  reserves  of  the  Banks  on  notes  and  credits 
issued  in  the  discount  of  accommodation  bills,  and  who  re- 
ceived them  in  the  advanced  prices  charged  for  their  merchan- 
dise, deposit  them  in  the  Banks  to  serve  as  additional  reserves 
in  their  operations  ;  and  if  so,  why  may  not  the  Banks  keep  up 
their  usual  line  of  discounts  of  good  paper  ?  "  The  answer  is 
obvious:  the  stimulus  given  to  consmnption  due  to  the  in- 
crease of  currency  on  accommodation  bills  will  have  caused 
a  large  increase  of  consumption  of  foreign  goods  which  will 
have  to  be  paid  for  in  coin.  So  far,  the  specie  drawn  would 
go  out  of  the  country.  Such  portion  of  it  as  had  been  drawn 
and  retained  in  the  Banks  would  be  used  by  the  depositors  as 
reserves  for  their  own  operations,  which  would  always  be  m- 


36  THE   LAWS    OF    MOXET. 

creased  in  ratio  to  the  increase  of  their  means.  These  reserves 
would,  at  all  times,  be  subject  to  their  necessities ;  thej  might 
be  wholly  di-awn  at  any  moment.  In  such  case  the  Banks 
would  find  themselves  in  the  dilemma  already  described. 
Every  institution  and  every  person  engaged  in  business,  must 
maintain  reserves  in  ratio  to  the  magnitude  of  their  operations. 
They  are  to  make  good  their  own  losses.  Those  of  one  party 
should  never  be  held  to  make  up  for  those  of  another.  If  re- 
serves are  lost  from  any  cause,  they  must  be  made  good,  either 
out  of  fresh  capital,  or  by  reducing  liabilities,  so  that  the 
proper  ratio  may  be  preserved. 

An  inflation  and  contraction  precisely  similar,  with  similar 
results,  would  as  necessarily  follow  the  discount  of  bills  given 
in  the  purchase  of  real  estate  as  of  accommodation  paper. 
Purchases  made  in  this  manner  would  be  in  a  great  measure 
speculative,  both  on  the  part  of  buyer  and  seller.  A  seller 
who  wanted  to  reinvest  his  means  in  property  similar  to  that 
sold  would  never  take  bills  therefor,  leaving  the  title  of  the 
property  sold  in  the  possession  of  the  purchaser.  Should  the 
bills  given  as  the  purchase  money  be  discounted,  the  proceeds 
would,  as  a  rule  be  used  to  meet  the  personal  expenditures  of 
the  seller ;  or  he  would  enter  upon,  or  would  lend  them  to  a 
party  entering  upon,  some  enterprise  in  which  they  would  be 
speedily  paid  out  for  material  and  labor.  In  such  case,  there 
would  be  a  corresponding  inflation  in  prices  from  a  corre- 
sponding increase  of  the  instruments  over  the  means  of  expen- 
diture. In  order  that  the  bills  might  be  paid,  the  property 
for  which  they  were  given  would  have  to  be  sold  previous  to 
their  maturity.  Bills  given  for  merchandise  are  paid  because 
the  consumption  of  that  wliich  they  represent  is  absolutely 
necessary  to  sustain  life,  and  must  consequently  be  taken 
and  paid  for  before  they  will  mature.  Real  estate,  on  the 
other  hand  cannot,  like  merchandise,  be  eaten,  drunk,  nor 
worn ;  nor  is  its  ownership  at  all  necessary  to  its  use.  As  it 
cannot  be  consumed,  its  sale  never  can  be  forced  without 
danger  of  excessive  loss.  This  depends  upon  laws  wholly 
different  from  those  which  govern  sales  of  personal  property. 
Real  propert}  may  be  active,  as  the  phrase  is ;  or  months  or 
years  may  elapse  before  that  for  wliich  the  bills  discounted 
were   given  could  be  sold  without  involving  a  heavy  loss. 


THE    LAWS    OF   MOXEY.  37 

Merchandise  in  demand  for  consumption,  on  tlie  contrary,  can 
always  be  moved,  in  almost  unlimited  quantities,  by  a  sliglit  con- 
cession in  price.  Capitalists  will  be  always  ready  to  purchase, 
if  they  can  by  so  doing  make  a  commission  or  profit  on  the 
operation  only  slightly  exceeding  the  usual  rates  of  interest, 
well  knowing  that  consumption  will  speedily  take  it  off  their 
hands.  Sales  of  real  estate,  on  the  other  hand,  depend  upon 
so  many  contingencies,  that  the  manager  of  a  Bank  who  should 
discount  bills  given  for  it,  leaving  the  property  they  repre- 
sented in  the  hands  of  the  purchaser ;  or  in  fact  should  dis- 
count them,  taking  a  mortgage  on  the  property  for  which  they 
were  given,  would  be  esteemed  as  fit  only  for  the  madhouse. 

But  even  if  the  bills  given  in  the  piu'chase  of  such  kind  of 
property  were  paid,  their  discount  would,  as  a  rule,  involve 
the  same  losses,  and  in  the  end,  to  the  same  parties,  as  if  they 
were  not.  The  same  inflation,  with  the  same  advance  in 
prices,  would  be  the  result,  with  a  corresponding  excess  of 
expenditure,  and  production  at  a  correspondingly  high  cost. 
Their  pa^^Tiient  would  contract  the  currency  in  an  equal 
degree.  The  discount  of  similar  bills  might  postpone  suclj 
contraction ;  but  the  time  would  speedily  come  when  the 
holders  of  real  property  would  either  refuse  to  sell  at  any 
price,  taking  bills  in  pa}Tnent ;  or  the  Banks  would  refuse  to 
discount  bills  given  for  it  for  fear  that,  the  fact  becoming 
known,  their  credit  would  be  so  far  impaired  that  the  notes 
and  credits  issued  bv  them  would  be  immediatelv  demanded 
in  coin,  instead  of  being  held  and  used  as  currency.  As  soon 
as  they  ceased  to  discount  such  bills  the  currency  would  be 
permanently  contracted  in  an  equal  degree,  with  all  the- conse- 
quences which  have  been  described.  With  a  fall  of  prices, 
bills  given  for  merchandise  could  not  be  paid.  A  still  further 
contraction  would  be  the  result.  In  this  way,  contraction 
might  follow  contraction  till  the  operations  of  production  and 
trade  became  involved  in  almost  hopeless  embarrassment. 
It  is  notorious  that  speculations  in  real  estate  have  been 
among  the  most  potent  causes  of  those  financial  re^iilsions 
which  periodically  sweep  over  such  countries  as  the  United 
States,  where  the  greatest  inducements  always  exist  to  engage 
in  such  operations,  from  the  constant  appreciation  in  value 
of  such  property  from  the  rapid  increase  of  the  country  in 
population  and  wealth. 


38S106 


38  THE    LAWS    OF    MONEY. 

Similar  remarks  apply  with  almost  equal  force  to  the  dis- 
count of  bills  given  in  the  purchase  of  secuiities,  such  as 
bonds  of  government,  or  of  corporate  bodies  of  one  kind  or 
another.  Such  securities,  like  real  property,  can  be  neither 
eaten,  drunk,  nor  worn.  A  currency  issued  on  bills  given  in 
their  discount  could,  as  a  rule,  be  returned  to  the  Banks  by 
their  makers  only  by  the  sale,  before  their  maturity,  of  the 
securities  for  which  they  were  given.  In  this,  as  in  all  other 
cases,  that  which  is  symbolized  must  discharge  the  symbol,  or 
must  be  used  for  its  discharge.  If  it  could  not  be  sold,  the 
bills  would  not  be  paid.  If  sold  at  a  loss,  the  Bank  would 
have  to  bear  the  loss,  even  if  the  proceeds  of  the  sale  were 
paid  over  to  it.  If  not  paid,  the  currency  which  had  been 
inflated  in  their  discount  would  be  contracted  to  an  equal 
degree.  If  paid,  either  no  similar  bills  would  be  made,  —  for  it 
is  hardly  possible  that  any  one  possessed  of  securities  would 
sell  them  at  their  market  value,  taking  in  payment  bills  of 
purchasers,  —  or  the  Bank  would  soon  come  to  its  senses,  and 
refuse  wholly  to  discount  such  bills.  If  no  new  ones  of  the 
kind  were  made,  the  currency  after  having  been  inflated 
would  be  contracted  in  an  equal  degree,  with  all  the  conse- 
quences that  have  been  described,  greater  or  less  in  severity 
according  to  the  amount  of  illegitimate  paper  discounted. 

From  what  has  preceded,  the  reason  of  the  failure  of  all 
Banks,  the  capital  or  reserves  of  which  have  consisted  of  real 
estate  or  securities,  will  have  been  made  sufficiently  evident. 
All  cui-rencies,  to  be  accepted  as  such,  must  be  instruments 
representing  and  serving  for  the  distribution  of  merchandise. 
If  they  will  not  secure  to  their  holder  merchandise,  the  equiva- 
lent in  value  of  coin,  they  will  always  be  immediately  drawn, 
or  attempted  to  be  drawn,  in  coin.  The  holder  of  a  note  issued 
by  a  real-estate  Bank  does  not  want  that  which  it  represents, 
but  merchandise,  or,  in  the  absence  of  merchandise,  coin.  Such 
a  Bank  has  neither.  Should  it  seek  to  discount  nothing  but 
business  paper,  an  impossible  supposition  (for  all  such  Banks 
are  got  up  to  supply  the  lack  of  business  paper,  —  that  is,  of 
merchandise,  the  basis  of  business  paper),  no  one  would  take 
its  notes  and  credits  to  any  considerable  extent,  as  it  would  be 
seen  by  all  that  no  proper  provision  had  been  made  to  carry 
forward  its  operations,  or  to  meet  the  losses  to  which  it  would 
be  subjected.     Such  Banks,  tlierefore,  fi'om  the  very  nature  of 


THE   LA"WS    OF    MONEY.  39 

things,  have  never  been  able  to  make  even  the  first  successful 
start.  The  moment  they  have  attempted  to  issue  notes  and 
credits  as  currency,  these  have  always  been  presented  for  im- 
mediate redemption  in  coin.  As  they  can  pay  neither  mer- 
chandise nor  coin,  they  have  no  other  alternative  but  to  go  into 
immediate  liquidation. 

That  a  currency  may  at  all  times  be  convertible,  the  means 
for  its  redemption  must  always  be  provided  previous  to  its 
issue,  not  by  the  Bank,  but  by  the  public,  the  producers  of 
merchandise.  With  such  provision,  the  currency  from  the 
moment  of  its  issue  would  take  care  of  itself.  The  attempt 
to  make  such  provision  after  issue  would  be  certain  to  defeat 
itself.  When  merchandise  is  provided,  the  necessities  of  con- 
sumers compel  them  to  purchase  it,  piece  by  piece,  for  con- 
sumption. Their  necessities  and  purchases  will  have  the  effect 
to  maintain  its  price,  so  as  to  render  it  adequate  to  the  dis- 
charge of  the  currency  issued  against  it.  But  neither  real 
estate  nor  securities  can  be  taken  for  consumption,  piece  by 
piece  ;  they  must  be  sold  in  gross,  or  not  at  all.  A  proposition, 
or  a  necessity,  for  the  sale  of  a  large  amount  of  either  would 
be  naturally  met  by  the  public,  by  a  combination  not  to  pur- 
chase except  at  very  low  rates,  or  by  a  shyness  growing  out  of 
an  apprehension  that  sales  in  large  amounts  would  necessarily 
tend  to  bring  down  prices  by  creating  a  disturbance  in  the 
money  market.  The  residt  would  be  that  property  symbol- 
ized at  a  fair  value  would  not,  under  the  peremptory  sales 
that  would  be  necessary,  bring  half  that  at  which  it  was  sym- 
bolized :  the  loss  sustained  by  the  Bank  in  its  first  operations 
would  be  usually  sufficient  to  drive  it  into  liquidation.  The 
world  has  seen  no  end  to  attempts  to  establish  Banks  upon 
capital  other  than  coin  and  merchandise  ;  but  all  such,  without 
exception,  have  proved  disastrous  failures. 

For  similar  reasons,  bills  given  for  merchandise  not  in  de- 
mand for  consumption  are  no  better  subjects  for  discount  than 
bills  given  in  the  piu'chase  of  real  estate  or  securities.  Such 
merchandise,  since  it  could  not  be  sold,  would  not  retire  the 
notes  and  credits  issued  in  the  discount  of  the  bills  represent- 
ing it.  These  would  have  to  be  taken  in  by  paying  out  the 
corresponding  amount  of  coin.  It  is  in  the  discount  of  notes 
given  for  unsalable  merchandise  that  Banks  make  by  far  the 


40  THE    LAWS    OF   MOXEY. 

greater  part  of  their  losses.  Where  the  demand  for  their 
products  is  not  active,  producers,  as  a  means  of  tempting  pur- 
chasers, offer  longer  credits.  Merchants  will  often  buy  on  six 
months'  credit,  when  they  would  by  no  means  buy  on  a  credit 
of  tlu-ee,  well  knowing  that  within  the  shorter  time  they  could 
not  make  their  payments  out  of  the  merchandise  purchased. 
They  hope,  however,  to  be  able  to  turn  their  purchases  within 
the  longer  period,  and  so  take  the  risk.  If  merchants  take 
long  paper.  Banks  are  tempted  to  do  the  same  by  a  concession 
in  the  rate  of  discount.  In  the  mean  time,  producers,  being 
supplied  with  means,  push  then*  industries  without  any  refer- 
ence to  the  condition  of  the  market,  and  daih'  add  to  the 
stock  of  unsalable  goods  already  pressing  upon  it.  As  they 
increase  their  stocks,  they  again  tempt  purchasers  by  giving  still 
longer  credits ;  and  tempt  the  Banks  to  discount  the  new  bills 
by  increasing  the  rates  paid.  Producers  will  always  keep  at 
work  so  long  as  they  can  find  the  means  of  doing  so.  As  the 
bills  so  discounted  will  not  mature  till  a  long  time  after  the 
notes  and  credits  issued  in  their  discount  will  have  been 
returned  to  them  for  redemption,  the  Banks  must  take  in  the 
latter  b}^  paying  out  a  corresponding  amount  of  their  reserves. 
As  the}'  must  maintain  these  in  ratio,  it  is  here  assumed,  of 
one  of  the  former  to  five  of  liabilities,  thev  must  reduce  the 
line  of  their  discounts  in  like  ratio,  or  must  cease  discounting 
till  new  reserves  are  provided  equal  in  amount  to  those  drawn. 
In  either  case,  the  currency  must  for  a  time  at  least  be  con- 
tracted, and  prices  must  suffer  a  corresponding  decline.  As  soon 
as  it  was  seen  that  the  market  was  a  falling  one,  no  one  would 
purchase  at  all,  or  only  sparingly,  or  at  greatly  reduced  prices, 
or  at  those  far  below  the  cost  of  production.  As  goods  could 
not  be  sold,  a  very  considerable  portion  of  the  long  paper  dis- 
counted could  not  be  paid.  With  every  failure  in  their  pay- 
ment, the  means  of  Banks  would  be  still  further  exhausted ;  so 
that  no  considerable  time  would  elapse,  before  the  holders  of 
their  notes  and  credits,  seeing  that  they  did  not  represent  mer- 
chandise adequate  for  their  redemption,  woidd  for  their  own 
security  rush  to  the  Banks,  and  demand  to  be  paid  in  coin. 
Their  immediate  suspension,  as  in  the  instances  already  given, 
would  be  the  necessary  residt. 

No  Bank,  as  a  rule,  will  discount  what  is  known  or  suspected 
to   be   accommodation  paper.     It  is  impossible  that  serious 


THE   LAWS    OF   MONEY.  41 

losses  should  not  result  from  its  discount.  On  the  other  hand, 
while  it  well  knows  that  it  should  discount  only  such  bills  as 
were  given  for  merchandise,  it  may  be  wholly  unable  to  form 
a  correct  opinion  as  to  its  salableness,  or  market  value.  The 
only  rule,  in  such  case,  that  can  protect  it  from  loss  is  that 
which  forbids  the  discount  of  any  bills  having  a  longer  time 
to  run  than  that  necessary  for  the  distribution  for  consumption 
of  the  merchandise  represented  by  them.  If  Banks  will  not  dis- 
count long  paper,  merchants  cannot  take  it  to  any  considerable 
extent.  The  merchant  is  to  be  trusted  that  the  price  he  contracts 
to  pay  shall  not  exceed  the  current  rate  at  the  time.  Should  he 
purchase,  say  on  three  months,  and  should  prices  soon  after 
show  a  tendency  to  fall,  he  will  not  add  to  his  stock  till  he 
sees  how  he  is  coming  out  with  that  already  on  hand.  The 
decline  which  may  be  suffered  before  his  bills  will  mature  will 
hardly  ever  be  sufficient  to  sweep  away  the  reserves  which 
every  careful  business  man  is  assumed  to  maintain.  Till  these 
are  exhausted  the  Banks  cannot  suffer.  His  declining  to  pur- 
chase is  timely  notice  to  producers  that  the  market  is  already 
overstocked.  If  purchasers  will  not  buy,  producers  can  get 
no  bills  for  discount ;  and,  if  they  cannot,  they  must  of  neces- 
sity reduce  their  production  in  ratio  to  the  falling  off  of  the 
demand. 

From  what  has  preceded,  it  will  be  seen  that,  as  in  such 
countries  as  the  United  States  and  Great  Britain  Banks  and 
bankers  suppl}"  almost  all  the  instruments  of  consumption,  they 
are  directly  responsible  for  the  greater  part  of  the  fluctuations 
that  are  constantly  taking  place  in  production  and  trade,  and  for 
those  great  financial  revulsions  which  from  time  to  time  sweep 
over  them  with  such  disastrous  effects.  There  can  be  no  con- 
siderable fluctuations  in  price  or  values,  with  a  metallic  cur- 
rency, as  in  all  operations  equivalents  are  exchanged  at  the 
value  of  coin.  There  are  no  commercial  crises  in  Turkey,  and 
rarel}'  in  France,  where  most  of  the  dealings  are  in  a  currency 
of  metals,  —  of  capital.  The  money  in  circulation  is  itself  a 
proper  subject  of  exjienditure.  A  paper  currency  on  the  other 
hand,  while  it  may  serve  as  the  instrument,  may  by  no  means 
represent  the  proper  subjects  of  expenditure.  As  it  is  the  instru- 
ment of  expenditure,  —  as  it  serves  to  the  party  issuing  it  all 
the  functions  of  capital,  so  far  as  it  can  be  made  to  circidate  at 


42  THE   LAWS    OF   MONEY. 

all,  —  there  is  at  all  times  the  strongest  possible  motive  to 
needy,  improvident,  or  dishonest  parties  for  its  issue.  Such 
temptation  is  the  weak  point  in  all  symbolic  currencies,  and  is 
the  one,  of  all  others,  to  be  especially  guarded  against. 

While  there  is  the  strongest  temptation  for  the  issue  of 
paper  money  without  the  provision  of  adequate  means  for  its 
redemption,  there  will  always  be  a  plenty  of  parties  to  take, 
at  some  figure,  what  they  consider  of  doubtful  value,  or 
perhaps  worthless,  from  a  confidence  in  their  own  cleverness  in 
palming  it  off,  at  a  higher  rate  than  that  for  which  they  took 
it,  upon  others  more  credulous  or  less  informed  than  them- 
selves. They  flatter  themselves  that  they  shall  never  ''get 
stuck  "  with  it,  as  the  plirase  is.  It  is  here  that  the  moral,  or 
rather  the  immoral,  side  of  a  fictitious  or  fraudulent  cur- 
rency comes  in.  Its  possession  always  carries  with  it  the 
suggestion  of  fraud,  of  swindling  some  other  person  out  of 
a  sum  equal  to  a  portion  of  its  nominal  value.  The  most 
worthless  of  currencies  are  as  attractive  in  form,  and  promise 
as  solemnly  to  pay  coin,  as  the  most  valuable.  Those  who  deal 
in  them,  therefore,  start  with  their  case  more  than  half  made 
out.  As  most  currencies  are  good,  they  have  seldom  much 
difficulty  in  persuading  those  upon  whom  tliey  wish  to  impose 
them  that  those  they  hold  are  eclually  so.  The  wild-cat  curren- 
cies of  the  Western  States,  which  were  issued  in  such  abundance 
some  forty  years  ago,  could  never  have  got  into  circulation  but 
from  a  belief,  on  the  part  of  those  who  took  them,  that  they  could 
shove  them  off  upon  somebody  else  without  loss  to  themselves. 
Where  a  currency  is  a  fraud,  almost  every  act  of  the  com- 
munity using  it  is  tainted  with  fraud.  Of  all  agencies  at  work 
in  society,  a  fictitious  currency,  or  one  that  is  made  irredeem- 
able by  law,  is  the  most  potent  in  sapping  alike  its  moral  sense 
and  its  material  welfare. 

From  what  has  preceded,  it  will  be  seen  that  the  functions 
of  governments  in  the  matter  of  currencies  are  extremely 
limited.  A  metallic  currency  derives  its  value  wholly  (except 
in  some  countries  in  which  a  slight  charge  for  coinage  is  made) 
from  the  cost  of  the  metals  that  compose  it.  The  stamp  of 
government  is  affixed  as  evidence  that  each  piece,  of  similar 
denomination,  contains  an  equal  quantitj'  of  pure  metal.  Coin- 
age is  an  attribute  of  the  supreme  power,  for  the  same  reason  as 


THE   LAWS    OF   MONEY.  43 

is  the  establishment  of  a  uniform  system  of  weights  and  meas- 
ures. It  often  has  no  property  in  the  metals  it  coins,  and  has 
no  more  to  do  with  their  value  than  it  has  with  the  value  of  the 
material  out  of  which  are  made  the  weights  and  measures  it 
establishes.  If  the  quantity  of  pure  metal  in  a  coin  is  increased 
or  reduced,  from  whatever  cause,  the  value  of  the  coin  is  in- 
creased or  reduced  in  an  equal  degree,  its  denommation  mean- 
while remaining  the  same. 

Its  functions  in  the  creation  of  a  symbolic  currency  are,  if 
possible,  still  less  important  than  in  the  creation  of  a  metallic 
one.  It  neither  provides  the  means  for  its  conversion,  nor  does 
it  affix  its  stamp  to  the  materials  of  which  it  is  composed.  All 
it  can  properly  do  is  to  add  its  sanction  to  laws,  not  of  its  own 
enacting,  but  arising  out  of  the  operations  of  production  and 
trade.  It  has  been  shown  that  a  symbolic  cuiTency  repre- 
sents merchandise,  and  is  discharged  by  its  purchase  for  con- 
sumption ;  that  so  long  as  it  is  symbolic,  it  must,  as  a  rule,  be 
discharged  in  this  manner,  and  without  the  intervention  of  coin. 
In  creating  a  Bank,  therefore,  the  government,  as  the  custo- 
dian of  the  public  welfare,  need  make  hardly  any  other  pro- 
vision than  to  forbid  the  issue  of  currency  except  in  the  discount 
of  bills  given  in  the  purchase  of  merchandise,  and  maturing 
within  four  months  ;  or  within  the  time  required  for  its  distribu- 
tion to  its  consumers.  The  amount  of  reserves  to  be  main- 
tained, the  next  most  important  matter,  must  as  a  rule,  be 
left  to  the  discretion  of  its  managers. 

As  governments  are  never  possessed  of  merchandise  or  coin 
for  the  purpose  of  making  loans,  they  can  never  issue  a  cur- 
rency convertible  at  the  pleasure  of  the  holder,  nor  one  that  is 
not  at  a  discount  from  the  standard  of  coin.  The  currency 
they  issue,  therefore,  is  wholly  different  in  kind  from  that 
issued  by  Banks.  As  already  shown,  the  process  of  issue  of  the 
latter  consists  of  a  mutual  exchange  of  obligations,  —  of  their 
notes  and  credits  for  the  bills  of  their  customers.  The  parties 
to  whom  the  notes  and  credits  are  issued  are  the  producers  of 
merchandise.  Such  notes  and  credits  represent  such  mer- 
chandise, and  are  convertible  on  demand  into  it,  or  into 
coin,  at  the  option  of  the  holder.  The  makers  of  the  bills  dis- 
counted are  the  purchasers  of  the  same  for  distribution.  Al- 
though the  Banks  are  the  only  parties  that  undertake,  in  terms, 


44  THE   LAWS    OF   MONEY. 

to  convert  their  notes  and  credits  into  coin,  the  makers  of  their 
bills  contract  to  pay  to  them  a  corresponding  amount  of  coin ; 
or,  what   is  equivalent  thereto,  a  corresponding   amount  of 
notes  and  credits.     They  are  consequently  the  parties  that  are 
to  retire  such  notes  and  credits,  or  provide  the  means  there- 
for.    All  that  the  Banks  have  to  attend  to  is  to  see  that  they 
discount  nothing  but  good  bills.     This  done,  they  need  give 
themselves  no   further   concern.     All   the   burden  of  taking 
care  of  their  notes  and  credits  falls  upon  the  makers  of  such 
bills.     The   producers   of  merchandise,    as   endorsers   of  the 
bills,  also  guaranty  the  undertaking  of  their  makers.    So  long, 
therefore,  as  the  Banks  discount  only  solvent  bills,  their  notes 
and  credits  are   returned  to   them  automatically  in  manner 
already  described,  leaving  the  whole,  or  the  greater  portion,  of 
their  reserves  undrawn.    The  consumption  of  the  merchandise 
represented  by  such  bills,  or  hj  the  notes  and  credits  issued  in 
their  discount,  does  not  ordinarily  imply  impoverishment  or 
waste.     Consumption  is  the  necessary  condition  of  production. 
Laborers,  to  work,  must  be  sheltered,  fed,  and  clothed.     That 
which  has  been  consumed  is  constantly  reappearing  in  new 
forms.     So  long,  therefore,  as  the  industries  of  a  people  are 
properly  conducted,  production  will  always  be  in  ratio  to  con- 
sumption.    The  greater  their  consumption,  the  greater  their 
production  and  wealth.     The  currencies  issued  by  the  Banks 
are  simply  the  instruments  of  distribution  for  consumption  of 
that  which  they  represent,  which   is   to   provide   the   means 
for  their  retirement.    Such  merchandise  seldom  or  never  comes 
into  their  hands.     It  goes  directly  from  the  producer  to  the 
wholesale  merchant ;  and  from  the  latter  to  the  retailer,  by 
whom  it  is  broken  up  to  suit  the  wants  or  means  of  his  cus- 
tomers.    If  it  went  into  the  possession  of  the  Banks,  it  would 
have  to  be  handed  over  immediately  to  the  merchants,  as  the 
former  have  none  of  the  means  or  facilities  for  its  distribution. 
Currencies  issued  by  governments,  unlike  those  of  Banks, 
are  always  issued,  not  in  exchange  for  bills  which  their  makers 
are  to  pay,  and  by  their  pa}Tnent  retire  the  currency  issued, 
but  for  merchandise,  not  for  its  distribution  to  the  public,  but 
for  its  profitless  consumption,  usually  in  military  operations. 
Such  merchandise  is  never  made  the  basis  of  reproduction. 
Every  government  or   people,  consequently,  by  whom  it  is 
issued  is  just  so  much  the  poorer  therefor.     The  issuer  is  the 


THE   LAWS    OF   MONEY.  45 

only  party  that  undertakes  to  retire  it.  The  means  therefor, 
if  provided  at  all,  can  only  be  provided  in  the  future,  and  by 
taxation.  It  can  never  be  presently  retired.  It  would  never 
have  been  issued  had  the  means  for  its  retirement  been  pro- 
vided previous  to  its  issue.  It  is  always  the  last  confession  of 
imbecility  or  exhaustion.  As  it  cannot  be  presently  paid,  it 
must  always  be  at  a  discount  from  the  standard  of  coin,  which 
is  capital  in  hand,  and  as  capital  in  hand  must  be  more  valua- 
ble than  capital  to  be  received  at  a  future  day. 

A  currency  issued  by  government  is  made  legal  tender  in 
the  payment  of  debts  as  the  necessary  condition  of  its  circula- 
tion. The  effect  of  this  provision  is  to  cause  its  notes  to  be 
received  as  money  at  their  estimated  value,  otherwise  they 
would  no  more  have  the  attributes  of  money  than  any  other 
form  of  debt,  or  than  merchandise.  Their  value  is  greatest 
when  first  issued,  as  they  are  always  assumed  to  be  a  tem- 
porary expedient,  and  soon  to  be  retired  by  their  payment. 
Such  an  expectation  alone  might  for  a  time  maintain  their 
value  very  nearly  at  par  with  coin.  They  will  have  a  value 
equal  to  that  of  coin  to  all  parties  in  debt  at  the  time,  as  they- 
will  pay  their  debts  equally  with  coin.  A  market,  conse- 
quently, is  at  once  created  for  them  equal,  or  very  nearly 
equal,  to  the  whole  amount  of  merchandise  held  for  consump- 
tion, as  such  merchandise  is  usually  purchased  and  held  on 
credit.  They  decline  rapidly  in  value  so  soon  as  it  is  seen  that 
they  are  not  likely  to  be  speedily  paid,  and  as  contracts  exist- 
iuQ-  at  the  time  of  their  issue  are  discharged.  The  considera- 
tion  of  those  subsequently  entered  into  will  have  reference  to 
the  real  value  of  the  notes,  which  is  measured  by  the  time 
that,  in  public  estimation,  is  to  elapse,  before  they  are  retired 
by  payment.  The  effect  of  the  legal  tender  clause  is  to  cause 
them  to  circulate  as  money  at  their  estimated  value,  what- 
ever this  may  be.  If  they  become  valueless,  —  that  is,  if  in 
public  opinion  they  are  never  to  be  paid,  either  from  the  in- 
ability or  indisposition  of  their  issuers,  —  the  clause  ceases  to 
have  any  force  or  effect  whatever. 

While  the  issue  of  a  currency  of  legal  tender  notes  is  a 
most  direct  and  efficient  expedient  on  the  part  of  government 
for  raising  money,  no  act  can  at  the  outset  be  better  received  ; 


46  THE   LAWS   OF    MONET. 

for  it  seems  equivalent  to  the  creation  of  capital  equal  to  the 
whole  amount  issued.  It  is  capital  to  every  one  in  debt  and 
holding  merchandise  or  property.  Government  must  accept 
the  effect  of  its  own  act.  When  it  issues  legal-tender  notes  it 
is  the  great  consumer,  and  must  pay  an  advance  equal  to  the 
amount  of  the  instruments  of  consumption  —  money  —  with 
which  it  enters  the  market.  The  demand  which  it  creates 
may  suddenly  double  the  value,  in  paper,  of  all  the  merchan- 
dise upon  it.  The  holders  of  such  property  become  suddenly 
rich.  They  can  pay  their  debts  and  have  a  large  surplus  left. 
The  indebted  classes,  consequently,  always  eagerly  welcome  a 
currency  of  the  kind.     The  creditor  classes  —  the  capitalists 

—  seem,  at  the  same  time,  to  be  benefited  rather  than  injured, 
as  some  time  usually  elapses  before  the  currency  suffers  any 
considerable  degree  of  depreciation  ;  as  the  debts  owing  them 
are  more  readily  paid,  and  as  whatever  they  possess  is  largely 
advanced  in  price,  and  apparently  in  value.  The  delusion  on 
all  sides  is  increased  from  a  real  addition  to  the  means  of  con- 
sumption, the  greater  part  of  the  metallic  currency  previously 
in  circulation,  or  held  as  reserves  by  Banks  and  bankers.  All 
this  becomes  available  for  consumption,  and,  as  it  is  no  longer 
needed  at  home,  it  is  speedily  sent  abroad  in  the  importation 
of  merchandise  of  one  kind  or  another,  but  largely  of  luxuries 
to  gratify  an  already  pampered  ai)petite.    A  currency  of  capital 

—  of  coin  —  will  never  circulate  alongside  of  a  currency  of 
debt  to  which  is  given  the  legal  competency  of  coin.  Of  the 
two  methods,  or  instruments,  the  least  valuable  will  always 
have  the  preference.  No  fact  in  reference  to  money  is  more 
universally  recognized  than  this.  In  the  abundant  su])ply 
of  capital,  as  well  as  of  the  instruments  of  expenditure,  it  would 
not  be  singular  if  even  the  coolest  and  most  sagacious  lieads 
should  come  to  regard  such  abundance  and  activity  as  the 
evidence  of  a  genuine  prosperity,  and  should  lose  themselves 
in  the  general  delirium. 

It  has  been  shown  that  a  s^-mbolic  currency  is  always  an 
accurate  measure  or  test  of  the  ability  of  a  people  to  consume. 
Such  a  currency,  or  the  capital  represented  by  it,  can  always 
be  made  the  basis  of  reproduction  of  an  equal  or  of  even  a 
greater  amount  of  merchandise,  as  production  should,  and 
always  does,  in  a  healthy  condition  of  industries,  exceed  con- 


THE   LAWS    OF   MONEY.  47 

sumption.  Such  an  excess  is  the  test  of  the  prosperity  and 
progress  of  society.  The  fruit  tree,  or  the  field,  should  always 
realize  a  larger  sum  than  that  expended  in  its  culture.  But  a 
currency  issued  by  government  is  no  measure  or  test  of  ability 
of  the  people  to  consume.  It  is  the  evidence  of  a  want  of 
such  ability,  —  of  the  waste  or  loss  of  a  corresponding  amount 
of  capital.  As  it  is  however  treated  as  capital,  it  is  made 
the  basis  of  vast  industrial  and  commercial  undertakings,  the 
products  of  which  there  is  no  ability  on  the  part  of  the  public  to 
consume.  Utter  failure  and  disappointment  are  the  inevitable 
results.  The  condition  of  the  United  States,  to-day,  is  a  strik- 
ing illustration  of  the  eifect  of  the  use  of  a  currency  of  debt 
as  capital.  There  is  a  great  abundance  of  products  of  all  kinds, 
but  no  demand  for  them,  even  at  rates  far  below  cost.  All 
are  sellers,  —  none  buyers.  Utter  stagnation  prevails  in  all 
the  departments  of  commerce  and  trade.  No  one  dares  to  pur- 
chase in  excess  of  his  immediate  wants,  as  he  has  no  means  of 
telling  whether  there  will  be  any  market  for  what  he  buys. 
The  amount  of  money  in  circulation  is  no  test.  It  is  not  capital 
for  exportation,  nor  does  it  represent  capital  for  domestic  con- 
sumption. In  the  general  stagnation  which  prevails,  money 
flows  to  the  centres ;  but  no  one,  in  the  face  of  losses  which  stare 
at  him  on  every  hand,  dares  to  use  it  in  any  industry  whatever. 
He  fears  to  lend  it,  for  the  reason  that  the  borrower  may  be 
no  better  able  to  employ  it  than  himself.  He  sees  no  solution 
of  the  condition  of  things ;  nor  is  there  any,  but  for  government 
to  allow  the  people  to  provide  themselves  with  a  currency 
which  is  capital,  or  the  representative  of  capital.  Till  this  is 
done,  there  not  only  can  be  no  permanent  recovery,  but  the 
community  must  become  more  and  more  exhausted,  and  less 
able,  when  permitted  either  by  the  retirement  of  the  currency, 
by  its  payment,  or  by  repudiation,  to  resume  their  industries 
upon  any  thing  like  the  scale  of  the  past. 

It  has  been  seen  that  borrowers  at  Banks  always  pay  interest 
on  their  loans.  Although  this  is  paid  in  the  first  place  by  pro- 
ducers in  the  discount  of  bills  received  by  them  in  the  sale  of 
their  merchandise,  the  amount  is  added  to  the  price  at  which 
it  is  sold  to  be  paid  in  the  end  by  the  consumers.  The  latter 
must  pay  the  total  cost,  which  includes  distribution  as  well  as 
production.     If  they  fully  understood  the  process  of  distribu- 


48  THE    LAWS    OF    MONEY. 

tion  by  symbols,  they  would  more  readily  pay  interest  charged 
for  their  use  than  for  the  use  of  a  corresponding  amount  of 
coin,  as  they  would  see  that  by  their  means  merchandise  would 
come  to  them  at  a  lower  rate  than  by  the  use  of  a  currency  of 
coin.  Such  symbols,  as  they  represent  capital,  are  its  equiva- 
lent in  the  hands  of  every  holder  ;  and,  as  already  observed,  the 
possession  or  the  right  to  the  possession  of  capital  always 
carries  with  it  the  obligation  to  pay  interest  on  the  value  of 
the  same.  But  a  government  receives  no  interest  on  the  cur- 
rency it  issues,  for  the  reason  that  it  does  not  represent,  nor 
does  it  entitle  the  holder  to,  capital  (except,  perhaps,  in  the 
doubtful  contingency  of  its  ultimate  payment).  Such  a  cur- 
rency is  the  exact  opposite,  in  every  particular,  to  that  issued 
by  Banks.  No  one  ever  questions  the  propriety  of  a  demand 
by  the  latter  for  interest  on  their  issues.  The  borrower,  if  he 
choose,  could  require  to  be  paid  the  proceeds  of  his  loans  in 
gold  or  silver,  —  in  capital  in  hand,  —  as  well  as  in  notes  and 
credits.  If  he  take  the  latter,  it  is  for  his  own  convenience. 
But  no  act  could  be  regarded  as  more  absurd  than  for  a  gov- 
ernment to  demand  interest  on  its  issues  of  currency,  even 
from  those  to  whom,  in  consequence  of  owing  debts,  it 
would  in  their  payment,  be  equally  valuable  with  a  correspond- 
ing amount  of  coin ;  for  the  reason  that,  as  no  time  could  be 
agreed  upon  for  its  retirement,  no  basis  was  established  upon 
which  interest  could  be  calculated.  It  is  fifteen  years  since  the 
legal-tender  notes  of  the  United  States  were  issued.  Assuming 
that  they  will  be  paid  by  January  1,  1879,  the  interest  upon 
them  at  six  per  cent,  had  it  been  demanded  at  their  issue,  would 
have  exceeded  their  whole  nominal  value!  Loans  made  by 
Banks  are  for  certain  periods.  The  amount,  therefore,  paid  for 
the  use  of  their  currency  can  be  exactly  determined  when  it 
is  issued.  No  more  striking  illustration  can  be  given  of  the 
radical  difference  betwen  the  two  currencies  than  that  interest 
is  always  payable  upon  one,  and  never  upon  the  other. 

That  which  has  preceded  sufficiently  disposes  of  the  assump- 
tion of  all  writers  (without  exception,  I  believe)  upon  the 
subject  of  money,  that  a  currency  of  notes  issued  by  gov- 
ernment saves  to  it,  and  consequently  to  the  people,  in  relief 
from  taxation,  a  sum  equal  to  the  interest  on  its  amount. 
Such  an  assumption  is  an  absurdity  for  the  reason  that  in- 


THE    LAWS    OF    MONEY.  49 

terest  arises  from  the  possession  of  capital,  and  has  nothing  to 
do  with  the  character  of  the  parties  to  wliom  it  is  loaned. 
Governments  no  more  than  individuals  can  borrow,  nor  did 
a  government  ever  attempt  to  borrow  without  agreeing  to 
pay  interest.  By  seeking  to  avoid  its  payment  it  only  in- 
creases the  rate  from  the  discredit  attached  to  such  an  act. 
If  bills  discounted  at  Bank  do  not  in  terms  bear  interest,  it 
is  for  the  reason  that  the  amount  agreed  upon  is  included  in 
the  principal  sum,  to  be  deducted  from  the  amount  paid  the 
borrower.  Suppose  government  to  attempt  to  borrow,  at  the 
same  time,  on  bonds  bearing  no  interest,  and  upon  bonds  bear- 
ing interest  at  the  rate  of  six  per  cent  annually.  In  the  latter 
case  it  would  receive  an  equivalent  both  for  the  principal  and 
interest  which  were  contracted  to  be  paid.  This  might  be  a 
sum  equal  to  the  par  value  of  the  bonds ;  the  interest  to  'be 
paid  being  the  equivalent  for  the  use  of  the  sum  loaned..  In 
the  former  case,  interest  for  the  time  the  bonds  had  to  run 
would  be  deducted  from  the  amount  to  be  received  or  paid  in 
their  purchase.  If  the  bonds  were  made  payable,  in  say  sixteen 
years,  and  if  perfect  confidence  were  felt  that  tliey  would  be 
paid  when  due,  the  government  might  receive,  in  their  sale,  a 
sum  equal  to  that  which,  at  interest  at  a  high  rate,  say  ten  per 
cent,  (for  no  one  would  lend  at  the  same  rate  on  non-interest 
bearing  as  on  interest  bearing  bonds)  would  produce  a  sum 
equal  to  their  par  value.  People  in  dealing  with  govern- 
ments, as  well  as  with  each  other,  deal,  or  assume  that  they 
are  dealing,  in  values,  —  in  realities,  not  in  shams  or  fictions. 

Governments  not  only  pay  a  higher  rate  of  interest  on  non- 
interest  bearing  than  on  interest  bearing  securities,  but  they 
suffer  from  the  use  of  the  former  as  money  a  loss  far  ^-reater 
than  the  excess  of  interest  paid,  in  the  increased  price  of  every 
thing  they  have  to  purchase.  By  the  time  the  United  States 
had  issued  its  notes  to  the  amount  of  $400,000,000,  — a  sura 
about  equalling  the  coin  and  Bank  notes  in  circulation  in  the 
country  at  the  outbreak  of  the  rebellion, — the  prices  of  mer- 
chandise and  labor  of  all  kinds  were,  from  the  effect  of  such 
issue,  fully  doubled.  Assuming  the  amount  paid  in  such  pur- 
chases, by  the  Federal  as  well  as  the  State  governments  and 
municipal  bodies,  to  equal  1-3,000,000,000  after  the  notes  were 
issued,  the  excess  of  payments  growing  out  of  their  use  in  the 
prosecution  of  the  war  over  values  received,  measured  by  the 


60  THE  LAWS   OF   MONEY. 

standard  of  coin,  was  fully  $1,500,000,000.  This  vast  sum  is  a 
part  of  the  penalty  which  the  people  paid,  or  contracted  to 
pay,  for  the  use  of  a  legal-tender  currency. 

As  Banks  are  seen  to  maintain  in  circulation  notes  and 
credits  largely  in  excess  of  the  specie  they  hold,  why,  it  is 
asked,  may  not  a  government,  —  that  of  the  United  States,  for 
example,  —  with  reserves  in  coin  equalling  $50,000,000,  main- 
tain in  circulation  notes  to  the  amount  of  $250,000,000  ? 

All  currencies,  no  matter  their  kind,  circulate  only  at  their 
value.  Were  a  Bank,  holding  $50,000  in  coin,  to  issue  notes 
to  the  amount  of  8250,000,  making  no  other  provision  for  their 
payment,  they  would  circulate,  if  at  all,  only  at  their  actual  — 
that  is,  at  20  per  cent  of  their  nominal  —  value.  That  they  cir- 
culated at  their  par  value  would  be  due  to  the  fact,  that,  in 
addition  to  the  coin  held  by  the  Bank,  estimated  to  equal  one- 
fifth  of  its  liabilities,  it  held  bills,  speedily  to  mature,  exceed- 
ing the  amount  of  the  latter.  The  payment  of  its  bills  would 
retire  its  liabilities,  leaving  its  coin  untouched  in  its  vaults. 
Its  issues  would  not  inflate  prices,  as  each  would  have  its 
proper  constituent.  They  might  be  taken  in  a  dozen  times 
without  the  movement  of  a  dollar  of  its  reserves.  These 
would  be  drawn  only  to  take  in  such  notes  as  were  not  retired 
by  its  bills  ;  the  process  having  ah-eady  been  fully  described. 
That  the  amount  of  its  circulation  appeared  to  be  uniform 
would  be  due  to  the  fact,  that,  as  the  old  disappeared,  new 
symbols  would  be  issued,  in  equal  amount,  to  represent  new 
creations  of  merchandise. 

Currencies  issued  by  governments,  so  far  as  they  resemble 
those  of  Banks,  obey  a  similar  law.  If  a  government  should 
issue  notes  to  the  amount  of  $250,000,000,  providing  only 
$50,000,000  for  their  payment,  they  would  be  worth  only  20 
per  cent  of  their  nominal  value.  If  they  circulated  at  all,  it 
would  be  at  their  value.  If  a  government,  in  the  case  sup- 
posed, should  hold,  in  addition  to  its  coin,  good  bills  to  be 
speedily  paid,  representing  merchandise,  and  equal  in  amount 
to  its  notes,  these,  like  those  of  a  Bank,  would  pass  at  their 
nominal  value  from  the  provision  made  for  their  payment. 
As  they  would  return  to  it  without  drawing  its  coin,  it  might, 
were  it  possessed  of  new  bills  representing  merchandise,  make 
new  issues ;  so  that  its  notes  would  appear  to  be  uniform  in 
amount,  and  to  remain  permanently  in  circulation,  although 


THE  LAWS   OF  MONEY.  51 

constantly  appearing  and  disappearing.  They  would  circulate 
by  virtue  of  the  merchandise  represented  by  its  bills,  and  not, 
as  is  commonly  supposed,  by  virtue  of  the  coin  held  by  it. 
They  would  no  more  than  symbolic  currencies  of  Banks  inflate 
prices.  So  far,  the  action  of  Banks  and  of  a  government 
would  be  precisely  similar,  and  attended  by  similar  results. 
The  action  of  Banks  and  of  governments  in  the  matter  of 
currency  is  never  similar.  Governments  can  never  issue  con- 
vertible currencies.  Banks  can  maintain  in  circulation  none 
other.  That  of  the  latter  must  represent  capital,  or  cease  to  cir- 
culate :  they  mast  always  be  presently  payable.  Government 
currencies  are  always  issued  to  supply  the  lack  of  capital, 
never  as  instruments  for  loaning  it.  As  a  government  issuing 
them  can  never  pay  presently,  it  never  makes  them  pa3'able 
presently.  Their  value,  consequently,  depends  on  the  provision 
to  be  made  for  them  at  some  future  day.  As  plain  notes, 
whatever  their  value,  can  never  be  gotten  into  circulation  as 
money,  the  notes  of  governments  are  always  made  legal  tender, 
—  that  is,  a  competency  is  given  them  to  discharge  contracts 
at  their  nominal  value.  This  attribute  gives  them,  to  those  in 
debt  and  to  holders  of  merchandise,  a  value,  for  a  time,  nearly 
equal  to  that  of  coin  ;  and  is  one  of  sufficient  potency  to  drive 
coin  out  of  circulation,  which  plain  notes  can  never  do.  The 
value  of  legal-tender  notes,  whatever  it  may  be,  can  never 
equal  the  value  of  coin,  as  they  possess  only  one  attribute  of 
coin,  —  capacity  to  discharge  contracts.  They  cannot  be  used 
in  the  arts  ;  they  cannot  discharge  foreign  balances  ;  they  can- 
not serve  as  the  general  reserves  of  society.  They  cannot 
equal  the  value  of  coin  for  the  reason  that  they  are,  to  their 
whole  extent,  instruments  in  excess  of  the  means  of  expen- 
diture. Their  price  necessarily  declines,  at  least  in  ratio  to 
their  amount,  even  if  perfect  confidence  be  felt  in  their  ultimate 
paj-ment.  There  is,  on  account  of  their  issue,  no  less,  but 
always  a  far  greater  amount  of  other  kinds  of  currency  in  cir- 
culation. As  they  do  not  represent  merchandise,  they  are 
superfluous  to  their  whole  amount.  As  they  are  "lawful 
money,"  they  immediately  flow  into  the  banks  ;  increasing  their 
reserves,  and  with  them  their  issues,  in  far  greater  ratio.  As 
these  have  no  greater  value  than  their  representative,  they 
become  depreciated  in  ratio  to  the  whole  amount  of  currency 
for  which  they  form  the  reserves. 


62  THE  LAWS   OF  MOXEY. 


Even  "with  a  currency  of  government  notes,  its  warmest  ad- 
vocates always  seek  to  place  all  their  transactions  on  the  basis 
of  coin.  They  will  never  take  such  notes  at  any  price  but  at 
their  value,  or  their  supposed  value,  in  coin.  To  be  consis- 
tent, they  should  always  receive  them  at  their  par  value  equally 
with  coin.  To  do  this,  a  person  would  be  no  better  than  a 
lunatic.  In  every  sale,  it  is  sought  to  convert  that  which  is 
sold  into  something  that  shall  have  a  more  uniform  and  univer- 
sal value,  —  into  that  which  will,  at  cost,  when  desired,  secure 
to  the  holder  the  possession  of  any  and  all  other  kinds  of  prop- 
erty. No  one  at  the  present  day  can  cut  himself  off  from  the 
world.  He  must  consume  the  products  of  every  part  of  it. 
He  must  have  his  means  in  that  form  which  will  pay  for  the 
articles  he  consumes,  wherever  they  are  purchased.  He  is  com- 
pelled to  keep  this  fact  constantly  in  view;  and  if  any  interme- 
diary process  is  to  be  gone  through  in  the  sale  of  his  products, 
he  will  take  good  care  that  that  which  he  receives  shall  have 
the  value  of  coin.  The  degree  of  his  ability  to  do  this  measures 
that  of  his  thrift  or  success.  A  currency  of  government  notes 
is  certain  to  defeat  the  purpose  which  every  person  has  always 
uppermost  in  his  mind,  which  is  to  maintain  all  his  transac- 
tions on  a  specie  basis.  With  all  his  vigilance  and  skill,  it  is 
impossible  but  that  he  should  constantly  be  making  losses  in 
taking  them.  They  are  always  fluctuating  in  price,  often  exces- 
sively, from  causes  which  he  can  never  foresee,  and  which  he 
is  powerless  to  control.  The  only  way  by  which  he  can  hope  to 
escape  loss  from  such  fluctuations  is  to  demand,  in  notes,  more 
for  what  he  has  to  sell  than  it  is  worth  in  coin ;  so  that,  if  they 
fall  in  value,  he  may  still  escape  loss.  But  the  purchaser  who 
buys  to  sell  again  may  be  equally  subject  to  the  risk  of  loss, 
from  a  rise  in  price  of  the  currency.  If  that  rises  in  price,  mer- 
chandise necessarily  falls  equally  in  price.  He  consequently 
must  add  to  the  price  of  that  which  he  holds,  as  his  guarantee 
against  loss.  It  is  in  tliis  way  that  the  transactions  of  society 
become,  under  a  government  currency,  mere  gambling  opera- 
tions,—  mere  chances  at  hazard, — always  involving  a  risk  of 
loss,  and  inevitably  sapping  in  a  most  insidious  manner  the 
moral  sense  of  the  community.  For  the  reasons  stated,  prices 
of  all  kinds  of  merchandise  are  maintained  at  extravagant 
figures,  so  long  as  money  or  currency  can  be  had  to  carry  it. 


THE  LAWS   OF  MONEY.  53 

The  time  will  inevitably  come,  however,  in  which  holders  will 
be  forced  to  sell,  from  the  inability  or  indisposition  of  the  pub- 
lic to  purchase,  and  a  break  will  be  made  which  will  carry  prices 
far  below  what  they  would  have  been  in  coin,  under  a  currency 
of  symbols. 

It  is  always  to  be  remembered  that  the  great  problem  of  soci- 
ety is  distribution,  not  production.  There  is  hardly  a  member 
of  it  that  could  not  double  his  products,  could  he  find  a  market 
for  them.  He  has  only  to  extend  and  quicken  his  industries, 
to  add  additional  belts  to  the  shaft  already  in  motion.  His 
dijfficulty  comes  in  the  attempt  to  reach  consumers  who  may 
perhaps  be  on  the  opposite  side  of  the  globe.  As  the  slightest 
break  in  his  machinery  will  arrest  his  industries,  so  the  slight- 
est defect  or  interruption  in  the  process  of  distribution  may 
shut  him  off  from  his  markets  altogether.  The  former  he  may 
readily  repair ;  the  latter  is  far  beyond  his  reach.  A  rumor 
that  the  relations  between  two  European  powers  are  no  longer 
friendly  may  cause  an  American  merchant  engaged  in  the 
China  trade  to  stop  his  shipments  to  that  country  till  he  can 
see  what  is  to  be  the  issue.  Should  a  war  break  out,  and  his 
ventures  be  in  foreign  bottoms,  he  may  be  threatened  with  the 
loss  of  them.  The  rates  of  insurance  may  rise  excessively  ;  or 
the  money  market  may  become  so  disturbed  that  future  ship- 
ments may  involve  a  loss  where  previous  ones,  at  the  same 
rate  as  to  cost,  had  realized  a  profit.  So,  in  every  community, 
events  are  always  occurring  to  interfere  with  the  process  of 
distribution.  Its  instruments  may  be  supplied  by  a  Bank  which 
may  become  insolvent,  and  its  issues  lose  their  whole  power. 
A  corresponding  amount  of  merchandise,  consequenth^  will  be 
left  without  the  means  of  distribution,  and  will  fall  largely  in 
value.  Its  fall  will  affect  the  whole  market.  If  it  be  of  a 
perishable  nature,  it  may,  if  the  consumers  cannot  be  readily 
reached,  become  wholly  valueless.  A  great  merchant  may  fail, 
and  the  machinery  he  set  in  motion  and  directed  come  to  a 
sudden  stop.  If  others  cannot  be  readily  reached  to  fill  his 
place,  the  merchandise  which  he  held  may  have  to  be  thromi 
upon  the  market  at  half  its  cost.  The  moment,  therefore, 
that  one  goes  from  the  process  of  production  to  that  of  distri- 
bution, he  steps  from  the  firm  land  upon  an  uncertain  sea. 
Whether  the  inherent  difficulty  be  greater  in  one  case  than  the 


64  THE   LAWS    OF   MO^^EY. 

other,  it  is  certain  that  losses  arise  much  more  frequently  from 
defective  or  inadequate  methods  of  distribution  than  of  pro- 
duction. Theoretically,  the  power  of  people  to  consume  should 
equal  their  power  to  produce.  That  the  actual  power  to  con- 
sume does  not  equal  the  theoretical  power  may  be  owing,  in 
part,  to  the  want  of  a  proper  balance,  or  equilibrium,  in  pro- 
duction. In  the  latter,  however,  the  best  methods  will  almost 
always  be  used.  No  one  would  assume  to  be  a  manufactui-er 
without  putting  machinery  into  a  building  which  he  might 
erect;  while  notliing  is  more  common  than  a  currency  dis- 
charged of  all  representative  value.  Such  a  currency  is  the 
great  disturbing  element  in  distribution,  and  none  so  much  so 
as  one  issued  by  a  government.  That  it,  without  a  dollar  at  its 
command,  can  issue  bills  to  serve  in  exchanges  between  nations 
is  too  absurd  for  belief;  yet  it  is  really  no  more  absurd  for  it  to 
issue  such  bills  than  to  issue  its  notes  to  serve  as  currency  in 
domestic  trade.  If  its  bills  issued  for  use  in  foreign  exchanges 
were  treated  as  capital,  as  possessing  a  value  in  coin  equal  to 
their  nominal  amount,  it  would  not  be  long  before  the  trade  in 
wliich  they  were  used  would  become  so  involved  in  confusion, 
and  the  loss  of  all  parties  to  it  so  excessive,  that  all  foreign 
commerce  would  come  to  a  stand,  not  to  move  again  till  the 
fictitious  bills  had  been  got  rid  of,  and  new  and  adequate  ones 
had  taken  their  place.  So  with  domestic  trade.  The  issue 
and  use  of  the  notes  of  government,  representing  nothing 
but  debt,  would  in  the  end  produce  results  precisely  similar  to 
those  following  the  use  of  fictitious  bills.  The  transactions 
for  which  th6y  were  used,  resting  on  no  adequate  foundation, 
would  never  produce  the  results  predicated  of  them ;  and  no 
great  length  of  time  would  elapse  before  the  affairs  of  the 
community  woidd  become  so  involved,  and  such  losses  would 
be  suffered,  as  in  great  measure  to  arrest  all  business  opera- 
tions. If  it  were  free  to  act  in  reference  to  its  interests,  it 
would  speedily  rid  itself  of  the  mischievous  instruments,  and 
substitute  adequate  ones  in  their  place.  Till  such  substitution 
was  made,  no  real  amendment  or  reUef  would  be  possible. 

The  great  call,  and  apparent  neces^ty,  in  countries  where  the 
currency  is  one  of  government  notes,  and  consequently  irre- 
deemable, is  for  a  flexible  currency,  —  one  always  adapted  to 
the  demand.     At  periods  when  the  crops  are  being  moved,  a 


THE   LAWS    OF   MONEY.  55 

great  deal  more  currency  is  required  than  at  others.  Why, 
it  is  asked,  should  it  not  be  made  to  correspond,  in  amount,  to 
the  transactions  that  are  taking  place,  instead  of  being  fixed 
at  an  unvarying  sum  ?  and  governments  issuing  it  are  always 
importuned,  whenever  there  is  a  great  stringency,  to  interpose 
and  increase  the  amount,  and  relieve  a  pressure  so  detrimental 
to  all. 

As  already  sliown,  a  symbolic  currency  rises  and  falls  in 
amount  with  the  value  of  the  merchandise  symbolized.  If  the 
value  of  wheat  received  at  Chicago  for  shipment  to  the  Eastern 
markets  for  the  present  year  (1877)  be  double  that  received 
for  the  same  purpose  in  1876,  bills  twice  in  number,  or  amount, 
will  be  drawn  the  present  year  over  those  drawn  the  year  pre- 
vious. The  currency  of  bills  in  both  years  must  correspond  to 
the  amount,  in  value,  of  the  exports.  The  currency  issued  by 
the  Banks  in  discounting  such  bills  would  equal  their  nominal 
value,  or  that  of  the  merchandise  they  represented.  The  local 
instruments,  consequently,  would  correspond  to  tlie  means  of 
consumption.  If,  on  the  other  hand,  the  crop  of  wheat  ex- 
ported from  Chicago  the  present  year  equals  only  one-half 
that  exported  in  1876,  only  one-half  the  bills  in  number,  or 
amount,  will  be  drawn  the  present,  as  were  drawn  the  previous, 
year.  As  a  necessary  consequence,  only  one-half  the  amount 
of  local  currency  will  be  created.  In  either  case  the  currency 
would  have,  in  the  highest  degree,  the  attribute  of  flexibility, 
as  it  would  correspond  perfectly  to  the  amount  of  merchan- 
dise to  be  moved.  No  small  amount  of  inconvenience  and 
suffering  might  result  from  a  great  falling  off  in  value  of  the 
exports,  and  a  corresponding  reduction  in  the  volume  of  the 
currency ;  but  no  one  would  venture  to  suggest  that  the  latter 
was  in  any  way  in  fault,  or  that  there  was  any  method  of  relief 
but  better  prices  or  better  crops. 

As  already  shown,  a  currency  of  government  notes  differs 
wholly  in  kind  from  one  based  upon  merchandise.  As  it  bears 
no  relation  to  the  means  of  the  community  upon  which  it  is  im- 
posed, it  is  justly  chargeable  with  a  want  of  flexibility.  An 
increase  in  its  amount  to  meet  an  extraordinary  call,  or  strin- 
gency, only  serves  to  increase  the  degree  of  its  inflexibility. 
With  every  increase  of  issue  prices  rise,  so  that  the  currency, 
relatively,  is  no  more  abundant  for  such  increase.  In  a  very 
short  time,  prices  of  all  kinds  of  property  are  adjusted  to  the 


56  THE    LAWS    OF    MOXEY. 

new  level.  With  every  increase  of  the  currency,  however,  the 
resources  of  the  people  are  diminished  in  like  ratio,  increasing 
in  like  degree  the  difficulty  that  those  in  debt,  and  from  whom 
the  clamor  of  inflexibility  always  comes,  find  in  borrowing 
capital,  or  the  notes  in  circulation,  which  are  capital  to  their 
possessor  to  the  amount  of  their  market  value.  The  meaning 
of  inflexibility,  consequently,  is  a  lack  of  capital.  The  demand 
for  flexibility  is  only  a  demand  for  a  gi'eater  quantity  of  cap- 
ital ;  or  that  which,  at  some  price,  will  serve  as  capital :  with 
every  additional  issue  the  demand  necessarily  increases  in  in- 
tensity, from  the  increased  impoverishment  of  the  community 
that  has  been  suffered. 

As  the  value  of  currencies  has  been  held  by  all  ^Titers  to  de- 
pend upon  their  quantity,  the  remedy  proposed,  to  restore  tlieir 
value  when  depreciated,  has  been  to  reduce  their  amount; 
or  to  cease  issuing  till  the  increase  in  number  or  magnitude  of 
the  exchanges,  due  to  an  increase  of  production,  shall  not  only 
give  full  employment  to  the  amount  in  circulation,  but  require 
an  additional  quantity.  Such  is  a  necessary  conclusion  from 
premises  which  assmne  value,  either  intrinsic  or  representative, 
to  be  no  necessary  attribute  of  money.  In  illustration,  it  is 
said  that  if  there  are  too  many  yardsticks  in  a  community, 
a  part  of  them  must  remain  in  abeyance  till  tlie  increase,  in  the 
number  of  yards  to  be  measured,  will  give  employment  to  all. 
The  price,  which  has  been  depreciated  from  an  excess  in  num- 
ber, will  then  rise  so  as  to  equal  cost. 

It  has  been  shown  that  the  value  of  money  is  the  quality 
or  attribute  which  measures  the  value  of  other  things ;  that, 
unlike  the  yardstick,  it  always,  when  used,  passes  in  exchange 
for  the  value  of  that  which  it  measures.  Yardsticks  and 
weights  do  not  measui-e  values,  but  space  or  quantity.  Neither 
do  we  say  that  one  place  is  so  many  dollars  distant  from 
another,  or  that  a  coat  is  worth  so  many  yardsticks.  Yet  it 
would  be  just  as  absurd  for  government  to  measure  space  by 
dollars,  and  values  by  yardsticks,  as  to  declare  that  its  notes, 
payable  at  a  future  day  without  interest,  shall  have  a  value 
equal  to  that  of  coin.  Governments  cannot  change  or  avoid 
the  operations  of  natural  laws.  It  would  be  mere  brutum  fid- 
men  for  them  to  declare  that,  after  a  certain  period,  equal  quan- 
tities of  copper  and  gold  should  have  the  same  price.     That  of 


THE   LAWS    OF   MONEY.  57 

each  will  always  be  regulated  by  its  value,  real  or  estimated. 
Government  notes  bear  no  relation  to  the  amount  of  capital  of 
a  community,  nor  will  they  ever  bear  any  relation  to  such 
amount.  They  will  be  just  as  much  out  of  place  ten  years 
after,  as  on  the  day  in  which  they  were  issued.  No  increase  of 
exchanges  will  increase  their  value.  They  are  never  issued 
in  the  outset  with  a  view  of  facilitating  exchanges,  but  always 
as  a  forced  loan.  They  are  always  suggested  by  the  necessi- 
ties of  government.  There  never  was  any  other  ground  for 
their  issue.  No  community  ever  lacked  the  means  of  exchange 
that  possessed  the  projier  subjects  of  exchange,  —  merchandise 
in  demand  for  consumption.  These  will  give  their  possessors 
all  the  money  —  gold  and  silver  —  they  are  entitled  to  for  any 
purpose.  In  higlily  civilized  countries  only  a  small  amount 
of  these  metals  is  used  as  currency,  exchanges  being  in  great 
measure  effected  by  the  use  of  symbols.  A  currency  of  gov- 
ernment notes,  therefore,  is  alwaj^s  superfluous.  An  increase 
of  exchanges  twenty-fold,  within  the  period  during  which  they 
are  in  circulation,  will  no  more  increase  their  value  than  it 
will  raise  the  price  of  other  articles  above  their  value.  The 
price  of  a  currency  issued  by  Banks  is  always  regulated  by  its 
value.  If  from  any  cause  it  is  depreciated  twenty-five  per 
cent,  an  increase  in  the  number  of  exchanges  will  not  exert 
the  least  influence  in  increasing  its  value.  If  a  metallic  cur- 
rency is  debased,  it  will  be  taken  only  at  the  value  of  the  pure 
metal  it  contains.  No  increase  of  exchanges  will  exert  the 
slightest  influence  over  its  price.  The  media  of  exchange  are 
the  things  exchanged  ;  they  mutually  measure  the  value  of 
each  other,  whether  they  be  coin  or  merchandise.  The  idea, 
therefore,  so  commonly  entertained,  that  a  currency  of  gov- 
ernment notes  can  be  increased  in  price,  can  be  absorbed,  as 
the  phrase  is,  so  as  to  raise  their  value  to  the  par  of  coin  by 
increase  in  the  number  of  exchanges,  is  one  of  the  most  pre- 
posterous and  absurd  ever  entertained.  Strange  to  say,  no 
opinion  has  a  stronger  hold  upon  the  public  mind. 

As  the  ability  of  an  issuer  of  notes  to  convert  them  depends 
largely  upon  their  quantity,  such  quantity  becomes  a  most  im- 
portant element  in  their  price.  If  a  government  like  the 
United  States  should  issue  $1,000,000  of  its  notes,  these 
might  maintain  their  value  very  nearly  at  par  from  the  ability 


58  THE   LAWS    OF   MONEY. 

of  tlie  government  to  redeem  them  at  any  moment,  and  a 
belief  that  they  would  be  siDeedily  redeemed.  If,  in  place  of 
$1,000,000,  $100,000,000  were  issued,  the  good  faith  of  the 
government  might  begin  to  be  questioned.  If  the  amount 
should  become  excessive,  the  decline  in  their  price  would 
become  excessive,  in  spite  of  the  strongest  assertion  on  the 
part  of  the  government  that  its  promises  would  be  faithfully 
kept.  When  the  want  of  ability  or  disposition  on  its  part 
to  take  in  its  notes  became  so  apparent  as  to  amount  to  a  moral 
conviction  that  they  would  not  be  taken  in,  they  would  cease 
to  have  any  value.  It  is  in  this  way  that  their  quantity  may 
be  said  to  control  their  value.  It  was  the  magnitude  of  the 
Revolutionary  currency  of  the  United  States  that  forbade  all 
thoughts  of  its  payment.  Its  circulation  was  sought  to  be 
enforced  by  laws  which  were  increased  in  number  and  severity, 
in  ratio  to  its  decline  in  price,  —  in  other  words,  in  ratio  to 
the  distrust  entertained  as  to  its  value .  When  it  was  felt  that 
it  was  worthless,  neither  the  laws  designed  to  secure  its  cir- 
culation, nor  those  which  declared  it  to  be  legal  tender  in  the 
payment  of  contracts,  had  any  effect  whatever  ;  although  the 
necessity  for  some  medium  of  exchange  increased  in  ratio  to 
the  disuse  of  that  previously  in  cu'culation.  The  French 
Assignats  went  out  of  use  from  a  conviction  of  their  worth- 
lessness,  and  in  face  of  laws  which  made  it  a  penal  offence  not 
to  receive  them ;  though  great  numbers  were  executed  for 
such  refusal,  and  the  country  left  for  the  time  almost  wholly 
without  a  medium  of  exchange. 

The  only  remedy  for  such  a  condition  of  things  is  repudia- 
tion,—  not  as  a  dehberate  act,  but  as  a  matter  of  sheer 
necessity.  It  was  far  better  to  repudiate  the  French  Assignats 
and  the  Revolutionary  Currency  of  the  United  States,  than 
to  attempt  to  pay  them.  Such  an  attempt  would  only  have 
prolonged  the  sufferings  that  had  been  endured.  The  wrong 
done  was  too  monstrous  ever  to  be  repaired  by  human  hands. 
There  is  no  instance,  so  far,  in  which  government  curren- 
cies, that  have  been  issued  in  any  considerable  amount,  have 
been  redeemed  by  full  payment.  Fortunately  the  most  signal 
instance  of  recent  times  —  the  present  currency  of  the  United 
States  —  is  not  so  excessive  as  to  forbid  the  hope  that  it  may 
avoid  the  fate  which  has  so  far  overtaken  all  of  its  kind. 


THE  LAWS  OF  MONEY.  59 

As  paper  money  should  be  issued  only  as  records  of  trans- 
actions, —  as  symbols  of  merchandise  to  serve  in  its  distrilju- 
tion,  —  and  as  the  test  of  its  legitimacy  or  propriety  is  its 
return  to  the  issuer  in  the  payment  of  the  bills  in  the  discount 
of  which  it  was  issued,  leaving  his  reserves  intact,  it  follows 
by  necessary  sequence  that  not  only  every  person  possessing 
merchandise  entering  into  consumption  is  competent  to  issue 
a  convertible  currency,  but  that  every  currency  to  be  used  by 
a  community  in  the  distribution  of  its  merchandise  should  be 
issued  within  it,  in  order  that  the  issuer  may  have  the  means 
of  possessing  himself  of  the  standing  and  trustworthiness  of 
the  parties  to  the  bills  discounted,  as  well  as  of  the  profitable- 
ness or  unprofitableness  of  their  industries.  Otherwise  he 
would  necessarily  be  constantly  making  losses  by  discounting 
fictitious  or  worthless  bills.  Local  bills  made  in  Texas  might 
be  very  proper  subjects  for  discount  by  Banks  in  that  State, 
while  they  would  be  very  improper  subjects  for  discount  by 
Banks  situated  in  New  York  or  Boston.  The  managers  of  the 
latter  might  have  no  personal  knowledge  of  the  character  or 
responsibility  of  the  parties  to  such  bills,  and  might  be  wholly 
unable  to  obtain  any  satisfactory  information  in  reference 
thereto.  In  such  countries  as  Great  Britain  and  the  United 
States,  local  currencies  are  supplied  by  local  institutions. 
Every  community  without  a  Bank,  or  banker,  issuing  currency, 
will  be  largely  wanting  in  the  instruments  most  essential  to 
the  promotion  of  its  welfare.  Were  there  no  Banks  in  the 
State  of  Texas,  for  example,  its  currenc}^  in  the  absence  of 
United  States  notes,  would  of  necessity  consist  chiefly  in  coin. 
As  it  had  no  Banks  previous  to  the  issue  of  such  notes,  its 
currency  consisted  in  a  great  measure  of  coin.  It  prosecuted 
its  industries,  consequently,  under  great  disadvantages  com- 
pared with  States  possessed  of  symbolic  currencies  which  dis- 
charoed  from  use  a  large  amount  of  coin,  to  be  held  as  reserves 
against  issues  of  paper  exceeding  many  times  the  amount  of 
coin  which,  in  the  absence  of  symbols,  could  have  been  main- 
tained in  circulation. 

Paper  currencies,  so  long  as  they  are  convertible,  will  never 
circulate  in  any  considerable  amount  at  a  distance  from  the 
place  of  their  issue.  They  cannot  ordinarily  get  far  distant 
therefrom,  as  they  must,  by  the  operations  of  trade,  return 
to   the   Bank   for   redemption  within  three  or   four   months 


go  THE    LAWS    OF   MONEY. 

from  their  issue.     The  notes  of  the  Banks  of  the  great  centres 
of  trade  in  the  Eastern  States  of  the  United  States  will  be 
readily  taken  in  the  most  distant  of  the  Western ;  but  they 
will  not  circulate  in  them,  as  they  will  be  immediately  taken  up 
for  remittances  to  the  Eastern  States,  in  favor  of  which  there 
is  always  a  constant  balance  of  indebtedness.     The  notes  of  the 
Banks  of  the  Western  States  can  never  obtain  circulation  in 
the  Eastern.     They  would  be  superfluous  as  currency  in  the 
latter,  and,  as  they  would  immediately  go   into  the   Eastern 
Banks  on  deposit,  they  would  speedily  be  returned  to  their 
issuers  for  payment  in  coin.     Banks  in  all  large  cities  make 
daily  settlements  with  each  other  through  Clearing  Houses, 
the  balances  arising  daily  being  discharged  daily.     Country 
Banks,  not  parties  to  Clearing  Houses,  are,  no  less  than  those 
that  are,  compelled  to  take  in  daily  a  portion  of  their  circula- 
tion, or  such  part  of  it  as  may  be  in  excess  of  the  wants  of  the 
public  for  the  distribution  of  merchandise.     All  currencies,  by 
whomsoever  issued,  are  subject  to  the  same  law  of  redemption 
within  the  time  ordinarily  required  for  the   distribution  of 
merchandise  from  producer  to  consumer. 

Very  different  ideas,  however,  upon  the  subject  of  paper 
money  prevail.  It  is  assumed  by  all  writers  upon  the  subject 
that,  as  a  rule,  currencies  will  remain  indefinitely  in  circula- 
tion provided  the  credit  of  the  issuer  remain  unshaken.  Paper 
money  is  described  by  all  as  a  "  credit  currency."  A  currency 
could  never  get  into  circulation  unless  it  was  supposed  to  rep- 
resent capital,  and  to  be  payable  on  demand  in  coin  ;  but  a  cur- 
rency with  millions  behind  it  is  subject  to  the  same  necessity 
of  redemption  as  one  that  is  not  supported  by  a  single  dollar 
(assuming,  of  course,  that  the  latter  circulates  as  currency 
from  the  credit  attached  to  it).  But  for  such  credit  it  would 
not  go  into  circulation  at  all,  or  it  would  be  immediately  pre- 
sented for  redemption  in  coin.  This  law  of  redemption  has 
been  wholly  overlooked  by  all  writers  upon  monetary  science. 
It  is  the  law  of  all  convertible  currencies  that  they  must  be  re- 
deemed within  comparatively  short  periods.  If  they  represent 
merchandise,  they  will  be  returned  to  the  issuer  by  virtue  of  the 
purchase  and  consumption  of  such  merchandise.  Redemption 
in  such  case  is  only  a  mutual  offset  of  liabilities.  If  not  re- 
tired in  this  manner,  it  must  be  taken  in  by  the  Bank  by  the 
payment  of  a  corresponding  amount  of  its  reserves. 


THE   LAWS    OF    MONEY.  QX 


In  that  which  has  preceded,  the  question  of  money,  in  all 
its  forms,  has  been  treated  as  one  coming  within  the  rann-e  of 
the  exact  sciences,  to  be  solved  by  purely  scientific  methods. 
As  those  here  employed  are  entirely  different  from  any  pre- 
viously used,  the  conclusions  arrived  at  are  wholly  different. 
All  previous  attempts  to  solve  this  question  have  failed 
from  the  employment  of  the  dialectical  method  in  the  inves- 
tigation of  questions  which  yield  only  to  scientific  analysis. 
Modern  writers  upon  the  subject  of  Political  Economy,  in 
which  that  of  money  has  been  included,  are  the  legitimate 
descendants  of  the  Schoolmen,  with  all  their  vain  and  frivolous 
distinctions  and  categories,  delivered  in  a  feeble  and  tumid 
rhetoric  much  better  fitted  to  repel  than  attract  investigation 
and  inquiry  by  those  not  so  tied  to  tradition  and  routine,  so 
careless  of  truth,  and  so  incapable  of  its  investigation,  as  them- 
selves. One  of  the  imperative  duties,  in  a  work  like  the  pres- 
ent, is  to  expose  the  false  and  vicious  methods  and  theories 
which  have  so  long  been  imposed  upon  the  world,  —  an  im- 
position which  future  times  might  well  believe  to  have  been 
impossible,  but  for  similar  illustrations  of  equally  ignorant 
assumption  on  one  side,  and  equally  ignorant  credulity  on  the 
other.  The  proper  execution  of  such  an  attempt  is  well  cal- 
culated to  form  one  of  the  most  interesting  chapters  in  the 
history  of  society. 


62  HISTOEY   OF  MOXETAEY  THEOEIES. 


HISTORY  OF  MONETARY  THEORIES. 

The  source  of  the  mouetary  theories  of  ancient  as  well  as 
modern  times,  as  well  as  of  the  doctrine  of  the  unlawfulness 
of  usury  which  remained  unchallensred  till  near  the  close  of 
the  eighteenth  century,  is  Aristotle.  His  views  upon  both  of 
these  subjects  will  be  sufficiently  set  forth  in  the  following 
extracts  from  his  works :  ^  — 

"  There  is,  also,  another  kind  of  acquisition  which  men  specially 
call  pecuniary,  and  with  great  justic-e  too  ;  and  by  this  imleed  it 
seems  that  there  are  no  bounds  to  riches  and  wealth.  Now  many 
persons  suppose,  from  tlieir  near  relations  to  each  other,  that  this 
is  one  and  the  same  with  the  art  just  mentioned  "  (which  he  terras 
elsewhere  natural  acquisition,  and  in  which  he  eml)races  what  is 
captured  in  war,  the  products  of  the  chase,  of  flocks  an<l  herds,  and 
of  the  soil) ;  "  but  it  is  not  the  same  as  that,  though  not  very  differ- 
ent ;  for  one  of  these  is  natural,  the  other  is  not,  but  rather  arises 
from  some  art  and  skill.  Now  let  us  enter  on  our  inquiry  into  the 
subject  from  the  following  point.  The  uses  of  every  possession 
are  two ;  both  indeed  essential,  but  not  in  the  same  manner ;  for 
the  one  is  strictly  proper  to  the  thing,  the  other  not;  as  a  shoe,  for 
instance,  may  be  either  worn  or  exchanged  for  something  else; 
for  both  these  are  uses  of  the  shoe  ;  for  he  who  exchanges  a  shoe 
with  some  man  who  wants  one,  for  money,  or  provisions,  uses  the 
shoe  as  a  shoe,  but  not  according  to  its  proper  use  ;  for  shoes  are 
not  made  to  be  exchanged.  The  same  thing  holds  true  of  all 
other  possessions ;  for  barter  in  general  had  its  original  beginning 
in  Nature,  from  the  fact  that  some  men  had  a  surplus,  and  others 
less  than  was  necessary  for  them.  And  hence  it  is  evident  that 
the  selling  provisions  for  money  is  not  naturally  a  part  of  pecuniary 
science;  for  men  were  obliged  "to  use  barter  as  far  as  would  supply 
their  wants.  Now  it  is  plain  that  barter  could  have  no  place  in 
the  first  community,  that  is  to  say  in  the  household,  but  must  have 
begun  when  the  number  of  those  who  composed  the  community 
came  to  be  enlarged ;  for  the  foraier  of  these  had  all  things 
the  same  and  in  common  ;  but  those  who  came  to  be  separated 
had  in  common  many  other  things  which  both  parties  were  obliijed 
to  exchange  as  then-  wants  arose."  ..."  This  sort  of  barter,  then, 

1  Aristotle's  "  Politics,"  Bohn's  edition,  Book  i.  Chap.  ix. 


ABISTOTLE.  63 

is  not  contraiy  to  Nature,  nor  yet  is  it  any  species  of  money-o-et- 
ting  ;  but  it  is  necessary  in  order  to  complete  that  independe'nce 
which  is  natural.  From  this  barter  however  arose  the  use  of 
money,  as  might  be  expected  ;  for  as  the  needful  means  for  im- 
porting what  was  wanted,  or  for  exporting  a  surplus,  was  often  at 
a  great  distance,  the  use  of  money  was  of  necessity  devised.  For 
it  is  not  every  tiling  which  is  naturally  useful,  that  is  easy  of  car- 
riage ;  and  for  this  reason  men  invented  among  themselves,  by  way 
of  exchange,  something  which  they  should  mutually  give  and  take, 
and  which  being  really  valuable  in  itself,  might  easily  be  passed 
from  hand  to  hand  for  the  purposes  of  daily  life,  as  iron,  or  silver, 
or  any  thing  else  of  the  same  nature.  .  .  . 

"  Money,  then,  being  devised  from  the  necessity  of  mutual  ex- 
change, the  second  species  of  money-getting  arose,  namely,  by  buy- 
ing and  selling;  and  this  was  conducted  probably  at  first  in  a 
simple  manner,  but  afterwards  it  came  to  employ  more  skill  and 
experience  as  to  where  and  how  the  greatest  profit  might  be  made. 
For  which  reason  the  art  of  monev-getting  seems  to  be  chieflv  con- 
versant  about  trade,  and  its  end  to  be  able  to  see  where  the 
greatest  profit  can  be  made  ;  for  it  is  the  means  of  procuring 
abundance  of  wealth  and  jiossessions.  For  men  oftentimes  suppose 
wealth  to  consist  in  the  quantity  of  money  which  anyone  possesses, 
as  this  is  that  medium  with  which  trading  and  trafficking  are  con- 
cerned  ;  others  regard  it  as  a  mere  trifle,  as  having  no  value  by 
nature,  but  merely  by  arbitrary  compact;  so  that,  if  those  who  use 
it  should  alter  their  sentiments,  it  would  be  worthless  and  unser- 
viceable for  any  necessary  purpose.  T/ins  oftetitimes  the  man  who 
abounds  in  m.oney  will  \nant  the  necessary  food ;  and  it  is  absurd 
to  say  that  wealth  is  a  thing  of  such  a  Jcind  that  a  man  icith  plenty 
of  it  around  him  may  perish  icith  hunger,  like  Midas  ^  in  the  fable, 
who  from  his  insatiable  wish  found  every  thing  set  before  him 
turned  into  gold.  For  which  reason,  people  look  about  for  some- 
thing else  by  way  of  riches  and  property,  and  rigluly  too ;  for 
the  mere  getting  of  money  differs  from  natural  wealth,  and  the 

1  It  is  remarkable,  not  that  Aristotle  should  not  have  been  able  to  appreciate 
the  significance  of  a  highly  spiritual  myth,  but  it  is  remarkable  that  he  should 
have  so  misstated  a  fable  which  originated  with  his  own  race.  Midas  by  no 
means  wished  that  every  thing  set  before  him  should  be  turned  to  gold ;  he 
wished  that  whatever  he  touched  should  be  turned  to  gold.  The  table  set  be- 
fore him  was  loaded  with  delicious  viands,  which  were  turned  to  gold  in  the 
attempt  to  convey  them  to  his  mouth.  He  was  caught  in  his  own  trap.  The 
moral  intended  to  be  drawn  was,  not  that  gold  possessed  no  value,  but  that  all 
inordinate  desires  defeat  themselves  ;  that  avarice  so  deadens  tlie  higher  facul- 
ties that  the  money  gained  by  it  is  itself  an  instrument  of  punishment.  It  has 
already  been  demonstrated  that  gold  and  silver  (money)  are  the  most  substantial 
of  all  kinds  of  wealth  ;  that  a  person  is  rich  in  ratio  to  the  amount  of  them  that  he 
possesses,  as  he  can  by  their  use  command  whatever  other  people  possess,  and  can 
never  come  to  want  so  long  as  there  is  food  or  clothing  for  the  use  of  any  one  ; 
■while  a  person  possessed  of  the  greatest  abundance  of  any  other  kind  of  property, 
sucli  as  food  or  clothing,  may  miserably  perish  from  his  inability  to  exchange 
that  which  he  has  for  other  articles  necessary  to  sustain  life. 


64  HISTOEY   OF   MONETARY   THEORIES. 

latter  is  the  true  object  of  economy  ;  while  trade  only  procures 
money,  not  by  all  means,  but  by  the  exchange  of  it ;  and  it  seems 
to  be  chiefly  employed  about  trading,  for  money  is  the  element  and 
the  regulator  of  trade,  nor  are  there  any  bounds  to  be  set  to 
the  wealth  which  is  thereby  acquired.  For  just  as  there  are  no 
limits  to  the  art  of  medicine  with  respect  to  health,  and  as  all  other 
arts  with  respect  to  their  ends  are  infinite  —  (for  those  ends  they 
desire  to  effect  to  the  farthest  possible  extent)  — but  still  the  means 
used  for  those  ends  are  limited,  and  their  several  ends  are  the 
limits  of  each  ;  so  too  in  the  art  of  acquiring  riches,  its  end  has  no 
limits,  for  its  object  is  money  and  possessions  ;  but  economy  has  a 
boundary,  though  the  former  has  not ;  for  acquiring  riches  is  not 
its  real  end.  And  for  this  reason  it  should  seem  that  some  bound- 
ary should  be  set  to  riches,  though  in  practice  we  see  the  con- 
trary of  this  taking  place ;  for  all  those  who  get  riches  add  to  their 
money  without  end.  The  cause  of  this  is  the  near  connection  of 
these  two  arts  with  each  other,  for  they  sometimes  change  employ- 
ment with  each  other,  as  getting  of  money  is  their  common  pursuit. 
For  they  each  employ  the  same^thing,  but  not  in  the  same  manner ; 
for  the  end  of  the  one  is  something  beyond  itself,  but  the  end  of 
the  other  is  merely  to  increase  it ;  so  that  some  jiersons  are  led  to 
believe  that  this  is  the  proper  object  of  economy,  and  think  that 
for  this  purpose  they  ought  to  continue  to  save  or  to  hoard  up 
money  without  end Such  persons  make  every  art  sub- 
servient to  money-getting,  as  if  this  was  the  only  end,  and  to  this 
end  every  thing  ought  to  contribute.  We  have  now  considered 
that  art  of  money-getting  which  is  not  necessary,  and  have  said  what 
it  is,  and  how  we  come  to  need  it ;  and  also  that  which  is  necessary, 
which  is  different  from  it ;  for  that  economy  which  is  natural,  and 
whose  object  is  to  provide  food,  is  not  infinite  like  this,  but  has 
its  bounds.  .  .  . 

"  That  which  was  doubted  at  the  first  is  now  clear,  as  to  whether 
the  art  of  getting  money  is  the  business  of  the  head  of  a  family  or 
a  State,  or  whether  it  is  not,  and  yet  must  of  necessity  exist ;  for 
as  the  political  science  does  not  make  men,  but,  receiving  them 
from  the  hand  of  Nature,  employs  them  to  proper  purposes ;  thus 
Nature,  whether  it  be  the  earth,  or  sea,  or  any  thing  else,  ought  to 
sixpply  them  with  provisions  ;  and  this  it  is  the  business  of  the 
master  of  the  family  to  manage  properly.  For  it  is  not  the 
weaver's  business  to  make  yarn,  but  to  use  it,  and  to  distinguish 
what  is  good  and  useful  from  what  is  bad  and  of  no  service  ;  and  in 
like  manner  some  one  may  inquire  Avhy  money-getting  should  be  a 
part  of  economy,  when  the  art  of  healing  is  not ;  since  it  is  as 
requisite  that  the  family  should  be  in  health  as  that  they  should 
eat,  or  have  any  thing  else  which  is  necessary.  Now,  as  it  is  indeed 
in  some  sense  the  business  of  both  the  master  of  the  family  and  the 
ruler  of  a  State  to  see  after  the  health  of  those  under  their  care, 
but  in  another  sense  not,  but  the  physician's  ;  so,  also,  as  to  money, 
in  some  respects  it  is  the  business  of  the  master  of  the  family,  in 
others  not,  but  of  the  servile  art.  But,  as  we  have  already  said,  it 
is  chiefly  the  part  of  Nature,  for  it  is  her  part  to  supply  her  off- 


ABISTOTLE.  65 

spring  with  food  ;  for  nourishment  is  left  for  every  tiling  born,  by 
that  which  gave  it  bii'th ;  and  hence  by  the  way,  the  natural  riches 
of  all  men  arise  from  fruits  and  from  animals.  But  since  these 
riches  may  be  applied,  as  we  have  said,  to  two  purposes,  the  one  to 
make  money  of,  the  other  for  the  service  of  the  house ;  of  these  the 
one  is  necessary  and  commendable,  the  other,  which  has  to  do  with 
traffic,  is  justly  censured,  for  it  has  not  its  origin  in  Kature,  but 
amongst  ourselves ;  for  usury  is  most  reasonably  detested,  as  the 
increase  of  our  fortune  arises  from  the  money  itself,  and  not  by 
employing  it  to  the  purpose  to  which  it  was  intended.  For  it  was 
devised  for  the  sake  of  exchange,  but  usury  multiplies  it.  And, 
hence,  usury  has  received  the  name  of  '  toxo^' '  or 'prof^wce,'  for 
whatever  is  produced  is  itself  like  its  parents ;  and  usury  is  merely 
money  born  of  money  :  so  that  of  all  means  of  money-making  this 
is  the  most  contrary  to  Nature." 

Aristotle  has  been  quoted  at  length,  as  a  necessary  condi- 
tion of  getting  at  his  ideas  upon  the  subject  of  money ;  as 
the  source  of  all  theories  or  opinions  which  have  prevailed  in 
reference  to  it  from  his  time  to  our  own ;  and  to  show  the 
methods  pursued  by  him,  by  his  legitimate  successors  the 
Schoolmen  of  the  Middle  Ages,  and  b}^  the  Political  Econo- 
mists, the  Schoolmen  of  modern  times.  His  method  of  resolving 
all  questions  by  verbal  distinctions,  by  dialectics,  relieved  him  of 
all  necessity  of  investigation  into,  or  analysis  of  their  law.  Of 
this,  his  treatment  of  mone  j  and  of  loans  of  it  at  usury  affords 
a  striking  illustration.  Money  was  an  invention  for  the  pur- 
pose of  facilitating  exchanges  of  property.  To  use  it  for  any 
other  purpose  was  against  Nature  ;  usury,  —  "  money  born  of 
money,"  —  a  crime  !  It  was  the  very  falseness  of  his  method 
that  gave  him  his  prodigious  ascendency.  By  means  of  it,  he 
was  enabled  within  the  period  of  a  very  few  years  to  construct 
what  he  assumed  to  be  a  universal  science.  His  conclusions, 
to  which  he  gave  all  the  authority  of  dogmas,  were  delivered 
with  an  eloquence  of  language  and  a  copiousness  of  illustration 
which  his  successors  could  never  hope  to  equal ;  still  less,  if 
they  had  wished,  to  controvert.  This  could  be  done  only  by 
the  discovery  of  the  law  of  that  to  which  they  related.  He 
had  an  eminently  active,  but  an  eminently  unscientific  mind. 
He  epitomized  his  time  and  his  race.  When  he  wrote,  the 
world  was  in  its  infancy  in  every  thing  that  characterizes  sci- 
entific analysis.  On  a  multitude  of  subjects  it  was  in  the  liigh- 
est  degree  impious  to  question  the  beliefs  and  traditions  of  the 
past.    Phenomenon  still  stood  for  law.    Reflection  and  inquiry, 


6Q  HISTORY  OF  MOZSTETAEY   THEORIES. 

with  the  race  as  with  the  individual,  come  only  with  the  matu- 
rity of  age.  He  has  been  termed  the  father  of  the  Inductive 
Method.  He  indeed  said  sometliing  as  to  the  necessity  of 
proceeding  from  particulars  to  generals,  and  of  deducing  frona 
a  comparison  of  facts  their  connection  and  law ;  but  it  never 
occurred  to  him  to  question  the  testimony  of  the  senses  ;  on 
the  contrary,  he  made  it  the  foundation  of  the  vast  super- 
structure he  undertook  to  rear.  His  method  was  necessarily 
deductive,  from  his  utter  ignorance  of,  or  inability  to  use,  the 
inductive  ;  from  the  imperiousness  and  arrogance  of  his  nature, 
and  from  the  purpose  he  had  in  view,  which  was  nothing  less 
than  to  solve,  in  an  age  wholly  incapable  of  any  thing  like  an 
adequate  investigation  of  natural  law,  every  question  coming 
within  the  range  of  human  experience.  He  was  the  impressible 
child,  full  of  animation  and  garrulity,  not  the  mature  man, 
silent  and  reflective  from  the  consciousness  of  his  own  igno- 
rance and  impotence  to  interpret  the  mighty  problems  which 
confronted  him  on  every  side.  Child  as  he  was,  his  statements 
and  illustrations  were  so  grotesque  and  fanciful  that  it  is  to  be 
wondered  that  he  did  not  see  their  in  conclusiveness  and 
absurdity.  Never  distiu'bed  by  a  doubt  as  to  the  soundness 
of  his  premises,  he  assumed  to  dispose  by  a  single  stroke,  not 
only  of  problems  for  which,  with  all  the  lights  of  the  present 
day,  ages  will  hardly  suffice,  but  those  wliich  wholly  transcend 
human  capacity.  The  manner  in  which  he  attempted  to  prove 
the  world  to  be  perfect  is  a  capital  illustration  of  his  method 
and  its  results  :  "  The  bodies,"  he  says,  "  of  which  the  Avorld 
is  composed,  are  solids,  and  therefore  have  three  dimensions. 
Now  three  is  the  most  perfect  number  ;  it  is  the  first  of  num- 
bers ;  for  of  one  we  do  not  speak  as  a  number  ;  of  two  we  say 
both  ;  but  three  is  the  first  number  of  which  we  say  all ;  more- 
over, it  has  a  beginning,  a  middle,  and  an  end  !  "  ^  By  a  similar 
method  he  undertook  to  prove  the  existence  of  a  fifth  element, 
or  essence.  "  Simple  elements,"  he  tells  us,  "  must  have  sim- 
ple motions,  and  thus  fire  and  air  have  their  natural  motions 
upward,  and  water  and  earth  have  their  natural  motions 
downward ;  but  besides  these  motions,  there  is  motion  in 
a  circle,  which  is  unnatural  to  these  elements,  but  which  is  a 
more  perfect  motion  than  the  other,  because  a  circle  is  a  per- 

1  Whewell's  "  Inductive  Sciences,"  Am.   ed.  vol.  i.  p.  72. 


AEISTOTLE.  67 

feet  line,  and  a  straight  line  is  not ;  and  there  must  be  some- 
thing to  which  this  motion  is  natural.  From  this  it  is  evident 
that  there  is  some  essence  or  body  different  from  those  of  the 
four  elements,  more  divine  than  those,  and  superior  to  them. 
If  things  which  move  in  a  circle  move  contrary  to  Nature,  it  is 
marvellous,  or  rather  absurd,  that  this,  the  unnatural  motion, 
should  alone  be  continuous  and  eternal ;  for  unnatural  motions 
decay  speedily.  And  so,  from  all  this,  we  must  collect  that 
besides  the  four  elements  which  we  have  here  and  about  us, 
there  is  another  removed  far  off,  and  the  more  excellent  in  pro- 
portion as  it  is  more  distant  from  us."  From  this  fifth  essence 
the  modern  word  quintessence  is  derived.^ 

The  preceding  illustrations  will  convey  a  sufficient  idea  of  the 
method  of  Aristotle,  and  explain  the  barrenness  of  its  results. 
The  premises  from  which  he  reasoned  were  the  untrained 
observations  of  phenomena,  or  the  extravagant  fictions  of  an 
ardent  and  fanciful  mind.  The  conclusions  to  which  he  came 
were  as  grotesque  and  fanciful  as  the  premises  themselves. 
They  were  like  attempts  to  solve  mathematical  problems  by 
using  numerals  that  accidentally  presented  themselves,  and 
guessing  at  the  results  of  their  combination.  If  he  could  not 
discover  the  unsoundness  of  his  p^'femises  and  the  inconclu- 
siveness  of  his  reasoning,  still  less  could  those  whose  only 
ambition  was  to  implicitly  adojDt  and  unfold  the  doctrines  of 
their  great  master.  The  more  they  commented,  the  more 
puerile  and  feeble,  compared  with  his,  their  rhetoric  and  illus- 
trations became.  His  mode  of  proof  of  the  perfection  of  the 
earth  possessed  some  charm  and  dignity  as  it  fell  from  his  lips. 
If  it  could  have  been  accepted  without  discussion,  no  harm  at 
the  time  could  have  come  of  it.  The  Greeks,  incapable  of 
scientific  inquiry,  would  have  been  as  well  off  with  this  as  with 
any  other  explanation  which  was  certain  to  be  as  far  from  the 
truth.  The  harm  came  from  the  discussions  that  followed. 
The  freshness  of  the  original  propositions  was  wholly  lost  in 
the  commentators ;  and  as  no  truth,  no  goal,  was  ever  arrived 
at,  no  end  ever  reached,  proposition  was  piled  upon  propo- 
sition, and  assumption  upon  assumption,  till  the  faculty  of 
reasoning,  of  perceiving  the  truth,  was  itself  lost,  and  the  race 
but  little  removed  from  a  condition  of  mental  idiocy.    Absurd 

1  Whewell,  vol.  i.  pp.  72,  73. 


68  HISTOEY   OF   MOyETART   THEORIES. 

as  -were  Lis  teachings  and  pretensions,  lie  is  bj  no  means  yet 
fully  dethroned.  He  still  is  an  authority  in  our  colleges,  and 
a  great  many  very  important  questions,  which  should  be  treated 
on  a  scientific  basis,  are  still  treated  by  his  methods,  —  that 
of  money  being  one  of  the  most  notable. 

"  It  is  highly  instmctive,"  says  "WTiewell,  in  his  History  of  the 
Inductive  Sciences,*  ''  to  trace  the  principles  of  this  undertaking  (of 
Aristotle)  ;  for  the  course  pursued  was  certainly  one  of  the  most 
natural  and  tempting  that  could  be  imagined.  The  essay  was  made 
by  a  nation  unequalled  in  fine  mental  endowments,  at  the  period  of 
it's  greatest  activity  and  vigor ;  and  yet,  it  must  be  allowed  (for,  at 
least  so  far  as  physical  science  is  concerned,  none  will  contest  this) 
to  have  been  entirely  imsuccessf  ul.  "We  cannot  consider  otherwise 
than  as  an  utter  failure,  an  endeavor  to  discover  tlie  cause  of  things, 
of  which  the  most  complete  results  are  the  Aristotelian  Physical 
Treatises  ;  and  which,  after  reaching  the  point  which  these  Treatises 
mark,  left  the  human  miu'l  to  remain  stationary,  at  any  rate,  upon 
all  such  subjects  for  nearly  tvro  thousand  years."  - 

It  was  not,  however,  till  nearly  fifteen  hundred  yeai-s  after 
his  decease,  that  Aristotle  began  to  exercise  a  paramount  and 
at  the  same  time  a  most  baleful  influence  over  the  human  mind. 
He  exerted  little  or  none  over  his  own  nation ;  and,  although 

1  Whewell,  vol.  i.  p.  56. 

2  "Aristotle  affords,"  says  Bacon,  "the  most  eminent  instance  of  the  first 
(sophistic  philosophy) ;  for  he  corrupted  natural  philosophy  by  logic :  thus,  he 
formed  the  world  of  categories,  assigned  to  the  human  soul,  the  noblest  of  sub- 
stances, a  genus  determined  by  words  of  secondary  operation,  treated  of  density 
and  rarity  (by  which  bodies  occupy  a  greater  or  lesser  space)  by  the  frigid  dis- 
tinctions of  action  and  power ;  asserted  that  there  was  a  peculiar  and  proper  motion 
in  all  bodies,  and  that,  if  they  shared  in  any  other  motion,  it  was  owing  to  an  ex- 
ternal moving  cause,  and  imposed  innumerable  arbitrary  distinctions  upon  the 
nature  of  things;  being  everywhere  more  anxious  as  to  definitions  in  teaching 
and  the  accuracy  of  the  wording  of  his  propositions,  than  the  internal  truth  of 
things.  And  this  is  best  shown  by  a  comparison  of  his  philosophy  with  the 
others  of  the  greatest  repute  among  the  Greeks.  For  the  similar  parts  of  Anax- 
agoras,  the  atoms  of  Leucippus  and  Democritus,  the  heaven  and  earth  of  Par- 
menides,  the  discord  and  concord  of  Empedocles,  the  resolution  of  bodies  into 
the  common  nature  of  fire,  and  their  condensation,  according  to  Heraclitus,  ex- 
hibit some  sprinkling  of  natural  philosophy,  the  nature  of  things,  and  experiment ; 
whilst  Aristotle's  physics  are  mere  logical  terms,  and  he  remodelled  the  same 
subject,  in  his  metaphysics,  under  a  more  imposing  title  ;  and  more  as  a  realist 
than  a  nominalist.  Nor  is  much  stress  to  be  laid  on  his  frequent  recourse  to  ex- 
periment in  his  books  on  animals,  his  problems,  and  other  treatises ;  for  he  had 
already  decided,  without  having  properly  consulted  experience  as  the  basis  of  his 
decisions  and  axioms,  and,  after  having  so  decided,  he  drags  experiment  along, 
as  a  captive  constrained  to  accommodate  hers*lf  to  his  decisions  ;  so  that  he  is 
even  more  to  be  blamed  than  his  modem  followers  (of  the  schohistic  school)  who 
have  deserted  her  altogether.  —  Xovum  Organum.    Book  i.  63. 


THE  school:mex.  69 

one  of  the  greatest  and  wisest  of  her  philosophers,  that  which 
he  did  exert  only  contributed  to  precipitate  her  fall.  The 
practical  and  unimaginative  Romans,  who  finally  included 
Greece  in  the  universal  empire,  regarded  at  first,  with  a  like 
contempt,  her  literature  and  culture.  At  no  time  did  these 
exert  any  considerable  influence  over  the  lives  or  fortunes 
of  the  conquerors :  at  least,  none  that  served  to  arrest  their 
decline  and  fall.  That  fall  buried  for  ages  all  the  culture  of 
the  past  in  its  ruins.  On  the  rise  of  the  new  nationalities,  and 
on  the  revival  of  learning  in  the  Middle  Ages,  it  could  not 
be  otherwise  than  that  scholars,  whose  own  tongues  were  com- 
pounds of  barbarous  dialects,  should  become  enraptured  with  a 
language  the  most  perfect  the  world  has  yet  seen  ;  should  with- 
out reserve  accept  Aristotle,  one  of  the  most  accomplished 
writers  of  this  language,  as  their  master,  and  should  regard  his 
works  as  the  great  store-house  of  human  wisdom. 

"We  may  consider,"  continues  Whewell,  in  his  History  of  the 
Inductive  Sciences,  "  the  reign  of  mere  disputation  as  fulfy  estab- 
lished at  the  time  of  which  we  are  now  speaking  "  (the  l'2th  and 
13th  centuries) ;  "the  only  kind  of  philosophy  henceforth  studied 
was  one  in  which  no  sound  pliysical  science  had  or  could  have  place. 
The  wavering  abstractions,  the  indistinct  generalizations,  and  loose 
classifications  of  common  languaore  which  we  have  already  noticed 
as  the  fountain  of  physics  of  the  Greek  Schools  of  philosophy,  were 
also  the  only  source  from  which  the  Schoolmen  of  the  Middle  Ages 
drew  their  views,  or  rather  their  arguments ;  and  though  these 
notional  and  verbal  relations  were  invested  with  a  most  complex 
and  pedantic  technicality,  they  did  not  on  this  account  become  at 
all  more  precise  as  notions,  or  more  likely  to  lead  to  a  single  real 
truth.  Instead  of  acquiring  distinct  ideas,  they  multipilied  abstract 
terms  ;  instead  of  real  generalizations,  they  had  recourse  to  verbal 
distinctions.  The  whole  course  of  their  employments  tended  to  make 
them  not  only  ignorant  of  physical  truth,  but  incapable  of  conceiv- 
ing its  nature. 

"  Having  thus  taken  upon  themselves  the  task  of  raising  and  dis- 
cussing questions  by  means  of  abstract  terms,  verbal  distinctions,  and 
logical  rules  alone,  there  was  no  tendency  in  their  activity  to  come 
to"3Tr  end,  as  there  was  no  progress.  The  same  questions,  the  same 
answers,  the  same  difficulties,  the  same  solutions,  the  same  verbal 
subtleties,  —  sought  for,  admired,  cavilled  at,  abandoned,  repro- 
duced, a'ffd  again  admired,  —  might  recur  without  limit.  John  of 
Salisbury  observed  of  the  Parisian  teachers,  that,  after  several  years' 
absence,  he  found  them  not  a  step  advanced,  and  still  employed 
in  urging  and  parrying  the  same  arguments ;  and  this,  as  Mr.  Hal- 
lam  remarks,  '  was  equally  applicable  to  the  period  of  centuries.' 
The  same  knots  were  tied  and  untied  ;  the  same  clouds  were  formed 


70  HISTORY   OF   MONETARY  THEORIES. 

and  dissipated.    The  poet's  censure  of  tlie  sons  of  Aristotle  is  just 
as  happily  expressed  :  — 

" '  They  stand 

Locked  up  together,  hand  in  hand. 

Every  one  leads  as  he  is  led  ; 

The  same  bare  path  they  tread, 

And  dance  like  Fairies  a  fantastic  round, 

But  neither  change  their  motion  nor  their  ground.i ' " 

The  ascendency  of  Aristotle  upon  the  revival  of  learning 
could  not  have  become  so  paramount,  but  for  the  fact  that  he 
was  accepted  as  authority  by  the  Church  equally  with  the 
Schools.  The  methods  of  the  two  were  precisely  the  same. 
Each  assumed  the  truth  of  the  premises  upon  which  the  sys- 
tems of  each  were  constructed.  The  Church  had  notliing  to 
fear  from  one  who  stood  in  the  way  of  all  inquiry  by  which 
truth  could  be  discovered,  and,  by  rendering  all  progress  im- 
possible, gave  for  a  time  an  historic  truth  to  the  famous  boast 
of  "  Semper  ^adem."  Uniformity  throughout  the  ages,  whether 
in  science  or  in  art,  in  religion  or  in  dogma,  is  the  uniformity  of 
death.  In  spite,  however,  of  Church  and  of  Aristotle,  discov- 
eries continued  to  be  made,  each  one  of  which  enlarged  the 
vision  and  means  of  those  that  followed.  The  spirit  of  free- 
dom and  inquiry  came  from  the  new  races.  They  burst  the 
bonds,  both  physical  and  religious,  in  which  the  world  had  so 
long  been  held.  For  such  an  effort,  neither  Greece  nor  Rome 
had  the  aspiration  nor  the  power.  So  firm,  however,  had  be- 
come the  grasp  of  the  Church  and  the  Schools  upon  the  human 
mind,  that  it  was  not  till  the  beginning  of  the  seventeenth  cen- 
tury that  Bacon,  for  the  first  time,  displayed  to  the  race,  in 
all  their  length  and  breadth,  the  methods  by  which  truth  is  to 
be  discovered,  —  methods  which  cannot  fail,  so  far  as  the  fac- 
ulties of  man  can  go,  to  unfold  all  the  laws  of  the  universe. 

The  difference  between  the  methods  of  Aristotle  and  Bacon 
is,  that  to  the  Aristotelian,  the  sun  rises  and  sets  ;  upon  the  evi- 
dence of  his  senses  he  immediately  constructs  a  system  which 
assumes  to  explain  all  the  phenomena  of  the  heavens.  To  the 
Baconian,  the  sun  appears  to  rise  and  set ;  but  from  this  ap- 
pearance he  draws  no  conclusions  whatever.  His  fii-st  essa}-  is 
to  test  the  accuracy  of  the  testimony  of  his  senses.  He  finds 
-\  fL^^A      in  the  end  that  the  phenomena  entirely  contradict  the  facts, — 


1  Whewell,  vol.  i.  p.  234-5. 


THE  school:mex.  71 

the  law,  the  appearance  ;  that  the  earth  moves  about  the  sun, 
instead  of  the  sun  about  the  earth  as  a  common  centre.  The 
system  which  he  erects,  consequently,  differs  wholly  from  that 
of  the  follower  of  Aristotle.  Both,  in  one  sense,  have  pro- 
ceeded inductively,  drawing  their  conclusions  from  premises 
which  appear  to  each  not  to  be  controverted.  Those  of  one 
are  the  testimony  of  his  senses,  or  propositions  framed  by  his 
own  fancy ;  from  these  he  immediately  proceeds  to  conclu- 
sions. The  other  draws  no  conclusions  from  the  testimony  of 
his  senses,  from  phenomena,  nor  from  his  fancies ;  but  first  pro- 
ceeds to  test  their  accuracy  or  truth.  This  done,  his  conclu- 
sions are  demonstrations  which  irresistibly  command  assent. 

The  exact  sciences  —  those  which  deal  in  space,  quantity 
and  number  —  were  the  first  to  emancipate  themselves  from 
the  Aristotelian  methods.  When  these  are  properly  pui-sued 
the  results  are  indisputable.  Astrology,  with  all  its  monstrous 
fables,  as  unmeaning  to  those  who  proposed  them  as  to  the 
ignorant  and  unlearned,  gave  place  to  astronomy.  Alchemy, 
with  all  its  assumption  of  creative  power,  gave  place  to  chem- 
istry, wliich  demonstrates  beyond  cavil  that  final  causes  lie 
beyond  the  reach  of  man.  In  these,  investigation,  whatever 
may  be  the  progress  made,  at  least  proceeds  by  proper  methods. 
In  many  of  the  moral  sciences,  however,  —  in  those  the  truths 
of  which  are  less  demonstrable  than  those  of  astronomy  and 
chemistry,  —  the  Schoolmen  still  exert  almost  paramount  au- 
thority. As  Religion  is  largely  a  matter  of  race,  there  is  probably 
no  solution  of  the  controversies  growing  out  of  it,  but  the  law 
of  the  stronger.  We  can,  however,  already  assimie  that  the  freer 
the  articulation  of  the  faculties  in  reference  to  it,  the  more 
effective  and  capable  do  man  and  the  race  become.  The  greater 
part  of  what  we  know  of  Medicine  is  that  the  schools  are 
wider  apart  than  ever:  there  is  no  concord,  for  the  reason 
that  there  are  no  demonstrations  that  command  assent.  In 
this  science  the  methods  of  the  Schoolmen  still  hold  sway. 
Negative  progress,  however,  has  been  made.  In  the  inability 
to  propose  remedies,  Nature  is  in  great  measure  allowed  to  do 
her  own  work,  —  a  confession  of  ignorance  and  incompetency 
by  which  mankind  has  immeasurably  gained.^ 

1  Of  what  may  be  termed  the  Moral  Sciences,  that  of  Law  seems  to  be  the 
only  one  in  which  any  considerable  or  satisfactory  progress  has  yet  been  made. 


72  HISTORY    OF   MO^^:TAEY   THEOELES. 

^Midway  betrveen  these  extremes  are  a  vast  number  of  sub- 
jects that  relate  to  the  economy  of  life, — law,  government, 
administration,  production,  distribution  ;  subjects  which  result 
from  the  joint  action  of  many  and  often  apparently  opposing 
laws.  These  become  all  the  more  difficult  of  solution  as  society 
advances  in  ci^-ilization  and  wealth.  All,  at  the  outset,  so  far 
as  they  were  treated,  were  necessarily  treated  after  the  man- 
ner of  the  Schoolmen.  The  theories  or  opinions  which  related 
to  money,  and  to  loans  of  money  at  usury,  came  directly 
from  Aristotle,  and  were  accepted  without  examination  or  res- 

The  results  or  demonstrations  in  this  rank  among  the  highest  achievements,  —  or, 
rather,  the  ability  to  accept  them  is  to  be  taken  as  the  most  decisive  and  satis- 
factory proof  of  the  moral  elevation  of  the  race.     Other  kindred  sciences  are 
broken  up  into  innumerable  Schools,  for  the  reason  that,  so  far,  there  have  in 
these  been  no  adequate  demonstrations,  no  common  points  of  agreement.   Schools 
are  another  word  for  guesses  at,  or  suggestions  of  probabilities.     There  are  no 
Schools  in  Astronomy,  for  the  reason  that  the  truth  or  falsehood  of  all  proposi- 
tions in  reference  to  it  is  a  matter  of  proof.     There  are,  or  should  be.  no  Schools 
in  Chemistry.    If  there  are  unsolved  problems  in  this  science,  conclusion  is  to 
be  held  in  aiieyance.    There  are  Schools  in  Medicine  and  Theology  for  the  rea- 
son that  the  claims  or  propositions  put  forth  by  their  teachers  are  inadequate  or 
partial,  and  are  consequently  untrue  to  the  general  sense  of  mankind.     From  a 
feeling  of  their  inadequacy  new  hypotheses  or  explanations  are  put  forth,  to 
give  place,  in  time,  to  otliers  perhaps  equally  unfounded  and  untenable.     There 
are  no  Schools  in  Law,  in  its  highest  sense,  for  the  reason  that  its  conclusions 
are  based  upon  sentiments  or  convictions  common  to  the  race.     All  have  a  sim- 
ilar sense  of  right  and  wrong,  and  when  interest  or  passion  is  not  involved, 
every  one  wishes  to  see,  in  tlie  laws,  the  embodiment  of  justice,  not  only  for  the 
protection  and  welfare  of  others,  wliich  every  one,  ordinarily,  desires  to  see  pro- 
moted, but  for  his  own,  when  his  rights  may  be  assailed.     As  every  legal  propo- 
sition is  open  to  criticism,  every  one  that  is  not  founded  in  justice,  or  in  conven- 
ience, is  sure  to  be  eventually  overthrown.     The  Civil  Law  afEords  a  splendid 
illustration  of  the  progress  made  in  legal  science  long  before  others,  now  so  prom- 
inent, may  be  said  to  have  had  an  existence.     It  is  one  of  the  greatest  monu- 
ments  of  human  wisdom.     There   never  was  a  similar  necessity  or  occasion. 
The  Roman  Empire  embraced  the  known  world,  with  every  variety  of  race  and 
nationality,  and  with  ideas  and  institutions  appropriate  to  each.     There  was,  so 
far  as  administration  was  concerned,  but  one  method  by  which  all  these  incon- 
gruous elements  could  be  fused  into  one  homogeneous  mass,  —  a  Code  to  wliich 
all  were  subject,  and  resting  upon  grounds  and  reasons  appreciable  by  all,  —  upon 
a  sense  of  justice,  and  of  fitness  of  things.     Although  it  was  a  maxim  of  the 
Roman  lawyers,  "  Quod  principi  j)lacuit  Jegis  habet  vigorem,"  yet  the  legislation  of 
the  Emperors,  if  such  it  may  be  called,  served  as  a  rule,  only  to  give  the  force  of 
law  to  the  reasoning  and  conclusions  of  the  wisest  and  purest  jurists  of  the  Em- 
pire.    In  this  way  the  CivU  Law  became,  as  far  as  possible,  the  expression  of 
pure  reason  when  it  dealt  with  principles,  and  of  pure  convenience  when  it  dealt 
with  their  application.    It  is  not  probable  that  the  world  will  ever  see  a  similar 
code,  one  so  just  in  principle  and  so  universal  and  beneficent  in  its  operation, 
for  the  reason  that  the  world  will  never  again  see  a  universal  Empire. 


AKISTOTLE.  73 

ervation.  With  him,  money  was  iiiTented  for  a  specific  pur- 
pose, and  was  entitled  to  no  consideration,  for  the  reason  that 
such  purposes  or  objects  were  contrary  to  Xature.  Those 
that  were  according  to  Nature  were  war,  the  chase,  the  care  of 
herds,  and  the  gathering  of  the  fruits  of  the  fields.  Such 
only  were  worthy  of  freemen  who  had  a  part  in  the  ad- 
ministration of  the  government.  With  him,  ti-ade  and  the 
mechanical  arts  were  contrary  to  Nature,  were  servile  ;  and,  as 
such,  were  worthy  only  of  those  who  occupied  an  inferior 
political  or  social  condition,  and  of  slaves.  Money  was  held 
in  the  same  indifference  or  contempt  as  were  those  by  whom  it 
was  chiefly  used.  It  was  unworthy  of  notice  or  investigation  ; 
it  was  base  because  those  who  used  it,  and  the  employments 
in  which  it  was  used,  were  base.  Such  was  the  founda- 
tion upon  which  was  reared  a  superstructure  which  has  out- 
lasted the  ages. 

The  views  of  Aiistotle  on  the  subject  of  usury  are  a  necessary 
sequence  of  his  views  upon  the  subject  of  money.  If  money- 
getting  by  trade,  or  by  exchanges  in  which  it  was  used,  was  con- 
trary to  Nature,  loans  of  it  at  usury  could  be  no  less  so.  They 
were  only  an  aggravation  of  the  original  wrong.  Contemp- 
tible as  such  reasoning  now  appears,  it  controlled  the  judgment 
of  mankind  for  twenty-two  hundred  years  !  "  This  absui-dity 
of  Aristotle,"  says  Lecky,^  "  and  the  number  of  centuries  during 
which  it  was  so  incessantly  asserted,  without  being,  so  far  as  we 
know,  once  questioned,  is  a  curious  illustration  of  the  longevity 
of  a  sophism  -  when  expressed  in  a  terse  form  and  sheltered  by  a 
great  name.  It  is  enough  to  make  one  ashamed  of  his  species 
to  think  that  Bentham,  so  late  as  1787,  was  the  first  to  bring 
into  notice  the  simple  consideration  that,  if  a  farmer  emj^loys 
borrowed  money  in  buying  bulls  and  cows,  and  if  these  pro- 
duce calves  to  the  value  of  ten  times  the  interest,  the  money 
borrowed  can  scarcely  be  said  to  be  sterile,  or  the  borrower 
to  be  a  loser ! " 

1  History  of  Rationalism  in  Europe,  vol.  ii.  page  251. 

2  The  history  of  Medicine  affords  a  still  more  striking  instance  of  the  "lon- 
gevity of  a  sophism  when  sheltered  by  a  great  name."  For  more  than  1,500 
years,  the  system  of  Medicine  established  by  the  celebrated  Galen,  a  Greek  phy- 
sician, held  undisputed  sway.  By  this  system,  to  use  the  words  of  Sir  WiUiam 
Hamilton,  "  Four  elementary  fluids,  their  relations  and  changes,  sufficed  to  ex- 
plain the  varieties  of  natural  temperament  and  the  cause  of  disease;    while 


74  HISTORY   OF  MONET AEY   THEORIES. 

After  Aristotle,  the  first  writer  whose  works  on  this  sub- 
ject possess  any  interest  or  value  was  the  celebrated  John 
Locke.  The  silver  currency  of  England  (the  only  one  then  in 
use)  had  become,  in  1696,  so  reduced  in  value,  fi-om  clipping 
and  wear,  as  to  cause  the  greatest  inconvenience  in  all  the 
operations  of  society.  The  coins  in  use,  no  matter  how  light, 
could  be  still  used  in  the  payment  of  debts  and  of  the  taxes 
due  the  government.  The  latter  attempted  for  a  long  time  to 
correct  the  evil,  by  causing  large  quantities  of  silver  to  be 
coined  of  the  standard  weight  and  fineness ;  but  as  the  old 
coins,  with  one-quarter  or  one-fifth  less  of  pure  metal,  were 

the  genius,  eloquence,  and  unbounded  learning  with  wliich  he  illustrated  this 
theory  mainly  bestowed  on  it  the  ascendency,  which,  without  essential  altera- 
tion, it  retained  from  the  conclusion  of  the  second  to  the  beginning  of  the  eight- 
eenth century.  .  .  .  Nor  was  this  doctrine  merely  an  erroneous  speculation ;  it 
exerted  the  most  decisive,  the  most  pernicious  influence  on  practice.  The  vari- 
ous diseased  affections  were  denominated  in  accommodation  to  the  theory.  In 
place  of  saying  that  a  malady  affected  tlie  liver,  the  peritonaeum,  or  the  organs 
of  circulation,  its  seat  was  assumed  in  the  blood,  the  bile,  or  the  lympli.  Tlie 
morbific  causes  acted  exclusively  on  the  fluids  ;  the  food  digested  in  tlie  stomach, 
and  converted  into  chyle,  determined  the  qualities  of  the  blood;  and  poisons 
operated  through  the  corruption  they  thus  effected  in  the  vital  humors.  All 
symptoms  were  interpreted  in  blind  subservience  to  the  hypothesis  ;  and  those 
only  attracted  attention  which  the  hypothesis  seemed  calculated  to  explain. 
The  color  and  consistence  of  the  blood,  mucus,  feces,  urine,  and  pus  were  care- 
fully studied.  On  the  other  hand,  the  phenomena  of  the  solids,  if  not  wholly 
overlooked,  as  mere  accidents,  were  slumped  together  under  some  collective 
name,  and  attached  to  the  theory  through  a  subsidiary  hypothesis.  By  sup- 
posed changes  in  the  humors,  they  explained  the  association  and  consecution  of 
symptoms.  Under  the  terras  cruditi/,  coction,  and  evacuation  were  designated  the 
three  principal  periods  of  diseases,  as  dependent  on  an  alteration  of  the  morbific 
matter.  In  the  first,  this  matter  in  all  its  deleterious  energy  had  not  yet  undergone 
any  change  on  the  part  of  the  organs ;  it  was  still  crude.  In  the  second.  Nature 
gradually  assumed  the  ascendent ;  coction  took  place.  In  the  third,  the  peccant 
matter,  now  rendered  mobile,  was  evacuated  by  urine,  perspiration,  dejection,  &c., 
and  equilibrium  restored.  When  no  critical  discharge  was  apparent,  the  mor- 
bific matter,  it  was  supposed,  had,  after  a  suitable  elaboration,  been  assimilated 
to  the  humors,  and  its  deleterious  character  neutralized.  Coction  might  be  per- 
fect or  imperfect ;  and  the  transformation  of  one  disease  into  another  was 
lightly  solved  by  the  transport  or  emigration  of  the  no.xrous  humor.  It  was 
principally  on  the  changes  of  the  evacuated  fluids  that  they  founded  their  judg- 
ments respecting  the  nature,  issue,  and  duration  of  diseases.  The  urine,  in 
particular,  supplied  them  with  indications  to  which  they  attached  the  greatest 
importance.  Examinations  of  the  dead  body  confirmed  them  in  these  notions. 
In  the  redness  and  tumefaction  of  inflamed  parts,  they  beheld  only  a  congestion 
of  blood ;  and  in  dropsies,  merely  the  dissolution  of  that  fluid ;  tubercles  were 
simply  coagula  of  lymph ;  and  other  organic  alterations,  in  general,  naught  but 
obstructions  from  an  increased  viscosity  of  the  humors.  The  plan  of  cure  was 
in  imison  with  the  rest  of  the  hypothesis.     Venesection  was  copiously  employed 


JOHN  LOCKE.  75 

used  as  currency  equally  witli  the  new,  the  latter  were  im- 
mediately taken  up  and  melted  down  and  exported  at  their 
value  as  bullion  or  merchandise  ;  so  that  no  progress  whatever 
was  made  in  remedying  an  evil  which,  at  the  time  Locke 
wrote,  had  become  well  nigh  insupportable. 

"  The  financiers  of  that  age,"  says  Macaulay,  in  his  graphic  pict- 
ure of  it,  "  seem  to  have  expected  that  the  new  money,  which  was 
excellent,  would  soon  displace  the  old  money  which  was  much 
impaired.  Yet  any  man  of  plain  understanding  might  have  known 
that,  when  the  State  treats  perfect  coin  and  light  coin  as  of  equal 
value,  the  perfect  coin  will  not  drive  the  light  coin  out  of  circula- 
tion, but  will  itself  be  driven  out.  A  clipped  crown,  on  English 
ground,  Avent  as  far  in  the  pa\-ment  of  a  tax  or  a  debt  as  a  milled 
crown.  But  the  milled  crown,  as  soon  as  it  had  been  fluncr  into  the 
crucible  or  carried  across  the  channel,  became  much  more  valuable 
than  the  clipped  crown.  It  might  therefore  have  been  predicted, 
as  confidently  as  any  thing  can  be  predicted  which  depends  on  the 
human  wdl,  that  the  inferior  pieces  would  remain  in  the  only  mar- 
ket in  which  they  could  fetch  the  same  price  as  the  siqierior  pieces ; 
and  that  the  superior  pieces  would  take  some  form  or  fly  to  some 
place,  in  which  some  advantage  could  be  derived  from  their  sujjc- 
riority. 

"  The  politicians  of  that  age,  however,  generally  overlooked  these 
very  obvious  considerations.  They  marvelled  exceedingly  that  ev- 
erybody should  be  so  perverse  as  to  use  light  money  in  preference 
to  good  money.     In  other  words,  they  mar\'elled  that  nobody  chose 

to  renew  the  blood,  to  attenuate  its  consistency,  or  to  remove  a  part  of  the  mor- 
bific matter  with  whicli  it  was  impregnated ;  and  cathartics,  sudorifics,  and  diu- 
retics were  largely  administered  with  a  similar  intent.  In  a  word,  as  plethora  or 
cacochymia  were  the  two  great  sources  of  disease,  their  whole  therapeutic  was 
directed  to  change  the  quantity  or  quality  of  the  fluids.  Nor  was  this  murderous 
treatment  limited  to  the  actual  period  of  the  disease.  Seven  or  eight  annual 
bleedings  and  as  many  purgations,  —  such  was  the  common  regimen  the  theory 
prescribed  to  assure  continuance  of  health  ;  and  the  twofold  depletion,  still  cus- 
tomary, at  spring  and  fall  among  the  peasantry  of  many  European  countries  is  a 
remnant  uf  the  once  \miversal  practice.  In  Spain,  every  village  has  even  now 
its  Sangrador,  whose  only  art  of  surgery  is  blood-letting ;  and  he  is  rarely  idle. 
The  medical  treatment  of  Louis  XIII.  may  be  quoted  as  a  specimen  of  the  hu- 
moral therapeutic.  Within  a  single  year,  this  theory  inflicted  on  that  unfortu- 
nate monarch  above  a  hundred  cathartics  and  more  than  forty  bloodings.  During 
the  fifteen  centuries  of  Humorism,  how  many  millions  of  lives  did  medicine  cost 
mankind  ?  "  ^ 

The  permanence  of  such  fallacies  as  the  unlawfulness  of  interest,  and  the 
himioral  theory  in  iledicine,  will  serve  to  lessen  our  astonishment  at  the 
continuance  to  the  present  time  of  monetary  theories,  equally  absurd,  which 
have  never  been  challenged  from  the  time  they  were  delivered  to  the  world  by 
Aristotle. 

1  Sir  WilUam  HamUton's  "  Discussions  on  PMlosopliy  and  Literature,"  .American  edition, 

pp.  246-2iS. 


76  HISTORY   OF   MONETARY  THEORIES. 

to  pay  twelve  ounces  of  silver  when  ten  ounces  would  serve  the 
turn.'  The  horse  at  the  Tower  still  paced  his  rounds.  Fresh  wagon- 
loads  of  choice  money  still  came  forth  from  the  mill ;  and  still  they 
vanished  as  fast  as  they  a])peared.  Great  masses  were  melted 
down;  great  masses  exported;  great  masses  hoarded:  but  scarcely 
one  new  piece  was  found  in  the  till  of  a  shop,  or  in  the  leathern 
bag  which  the  farmer  carried  home  from  the  cattle  fair.  In  the 
receipts  and  payments  of  the  Exchequer,  the  milled  money  did 
not  exceed  ten  shillings  in  a  hundred  pounds.  A  writer  of  that 
age  mentions  the  case  of  a  merchant  Avho,  in  the  sum  of  thirty-five 
pounds,  received  only  a  single  half-crown  in  milled  silver.  .  .  . 

"  The  evils  produced  by  "this  state  of  the  currency  were  not  such 
as  have  generally  been  thought  worthy  to  occu]>y  a  prominent  place 
in  history.  Yet  it  may  well  be  doubted  whether  all  the  misery 
wdiich  had  been  inflicted  on  the  English  nation  in  a  quarter  of  a 
century  by  bad  kings,  bad  ministers,  bad  parliaments,  and  bad 
judges  was  equal  to  the  misery  caused  in  a  single  year  by  bad 
crowns  and  bad  shillings.  Those  events  Avhich  furnish  the  best 
themes  for  pathetic  or  indignant  eloquence  are  not  always  those 
which  most  affect  the  happiness  of  the  great  body  of  the  people. 
The  misgovernment  of  Charles  and  James,  gross  as  it  had  been,  had 
not  prevented  the  common  business  of  life  from  going  steadily  and 
prosperously  on.  While  the  honor  and  independence  of  the  State 
were  sold  to  a  foreign  power,  while  chartered  rights  were  invaded, 
while  fundamental  laws  were  violated,  hundreds  of  thousands  of 
quiet,  honest,  and  industrious  families  labored  and  trailed,  ate  their 
meals  and  lay  down  to  rest,  in  comfort  and  security.  Whether 
Whigs  or  Tories,  Protestants  or  Jesuits  were  uppermost,  the  grazier 
drove  his  beasts  to  market:  the  grocer  weighed  out  his  currants : 
the  draper  measured  out  his  broadcloth  :  the  hum  of  buyers  and 
sellers  Avas  as  loud  as  ever  in  the  towns  :  the  harvest-home  was 
celebrated  as  joyously  as  ever  in  the  hamlets  :  the  creani  overflowed 
the  pails  of  Cheshire  :  the  apple-juice  foamed  in  the  presses  of 
Herefordshire :  the  piles  of  crockery  glowed  in  the  furnaces  of  the 
Trent ;  and  the  barrows  of  coal  rolled  fast  along  the  timber  rail- 
way of  the  Tyne.  But  when  the  great  instrument  of  exchange  be- 
came thoroughly  deranged,  all  trade,  all  industry,  were  smitten  as 
with  a  palsy.  .  .  . 

"  Since  the  Revolution,  the  state  of  the  currency  had  been  re- 
peatedly discussed  in  Parliament.  In  1689  a  committee  of  the 
Commons  had  been  appointed  to  investigate  the  subject,  but  had 
made  no  report.  In  1690  another  committee  had  reported  that 
immense  quantities  of  silver  were  carried  out  of  the  country  by 
Jews,  who,  it  was  said,  would  do  any  thing  for  profit.  Schemes 
were  formed  for  encouraging  the  importation  and  discouraging  the 
exportation  of  the  precious  metals.  One  foolish  bill  after  another 
was  broucfht  in  and  dropped.  At  length,  in  the  beginning  of  the 
year  1695,  the  question  assumed  so  serious  an  aspect  that  the  Houses 
applied  themselves  to  it  in  earnest.  The  only  practical  result 
of  their  deliberations,  hoAvever,  was  a  new  penal  law,  which,  it  was 
hoped,  would  prevent  the  clipping  of  the  hammered  coin  and  the 


JOHN  LOCKE.  77 

melting  and  exporting  of  tlie  milled  coin.  It  was  enacted  that 
every  person  who  informed  against  a  clipper  should  be  entitled  to 
a  reward  of  forty  pounds,  that  every  clipper  who  informed  against 
two  clippers  should  be  entitled  to  a  pardon,  and  that  wh'oever 
should  be  found  in  possession  of  silver  filings  or  parings  should  be 
burned  in  the  cheek  with  a  red-hot  iron.  Certain  officers  were  em- 
ployed to  search  for  bullion.  If  bullion  were  found  in  a  house  or 
on  board  of  a  ship,  the  burden  of  proving  that  it  had  never  been 
part  of  the  money  of  the  realm  was  thrown  on  the  owner.  If  he 
failed  in  making  out  a  satisfactory  account  of  every  ingot  he  was 
liable  to  severe  penalties.  This  Act  was,  as  might  have  been  ex- 
pected, altogether  ineffective.  Daring  the  following  summer  and 
autumn,  the  coin  went  on  dwindling,  and  the  cry  of  distress  from 
every  county  in  the  realm  became  louder  and  more  piercing. 

"  But,  happily  for  England,  there  were  among  her  rulers  some  who 
clearly  perceived  that  it  was  not  by  halters  and  branding-irons  that 
her  decapng  industry  and  commerce  could  be  restored  to  health. 
The  state  of  the  currency  had,  during  some  time,  occupied  the  seri- 
ous attention  of  four  eminent  men  closely  connected  by  public  and 
private  ties.  Two  of  them  were  politicians  who  had  never,  in  the 
midst  of  olficial  and  parliamentary  business,  ceased  to  love  and 
honor  philosophy  ;  and  two  were  philosophers  in  whom  habits  of 
abstruse  meditation  had  not  impaired  the  homely  good  sense  with- 
out which  even  genius  is  mischievous  in  politics.  Xever  had  there 
been  an  occasion  which  more  urgently  required  both  practical  and 
speculative  abilities ;  and  never  had  the  world  seen  the  highest 
practical  and  the  highest  speculative  abilities  united  in  an  alliance 
so  close,  so  harmonious,  and  so  honorable  as  that  which  bound 
Somers  and  Montague  to  Locke  and  Xewton.  .  .  . 

*'  In  whatever  way  the  restoration  of  the  coin  might  be  effected, 
great  sacrifices  must  be  made,  either  by  the  whole  community  or  by 
a  part  of  the  community.  And  to  call  for  such  sacrifices  at  a 
time  when  the  nation  was  at  war,  and  was  already  paying  taxes 
such  as,  ten  years  before,  no  financier  would  have  thought  it  possible 
to  raise,  was  undoubtedly  a  course  full  of  danger.  Timorous  poli- 
ticians were  for  delay ;  but  the  deliberate  conviction  of  the  great 
Whig  leaders  was  that  something  must  be  hazarded,  or  that  every 
thing  was  lost.  Montague,  in  particular,  is  said  to  have  expressed 
in  strong  lans^uasre  his  determination  to  kill  or  cure.  If,  indeed, 
there  had  been  any  hope  that  the  evil  would  merely  continue  to  be 
what  it  was,  it  might  have  been  wise  to  defer  till  the  return  of 
peace  an  experiment  which  must  severely  try  the  strength  of  the 
body  politic.  But  the  evil  was  one  which  daily  made  progress, 
almost  visible  to  the  eye.  There  might  have  been  a  recoinage  in 
1694  with  half  the  risk  which  must  be  run  in  1696  ;  and  great  as 
would  be  the  i-isk  in  1696,  that  risk  would  be  doubled  if  the  recoin- 
age were  postponed  till  1698. 

"  Those  politicians  whose  voice  was  for  delay  gave  less  trouble 
than  another  set  of  politicians  who  were  for  a  general  and  imme- 
diate recoinage,  but  who  insisted  that  the  new  shilling  should  be 
worth  only  nineiDeuce  or  ninepeuce  halfpenny.     At  the  head  of  thia 


78  HISTORY   OF  MONETAEY  THEORIES. 

party  was  TVilliara  Lowndes,  Secretary  of  the  Treasury,  a  most  re- 
spectable and  industrious  public  servant,  but  mucli  more  versed  in 
the  details  of  his  office  than  in  the  higher  parts  of  political  philosophy. 
He  was  not  in  the  least  aware  thata  piece  of  metal  with  the  king's 
head  on  it  was  a  commodity  of  which  the  price  was  governed  by  the 
same  laws  which  govern  the  price  of  a  piece  of  metal  fashioned  into 
a  spoon  or  a  buckle,  and  that  it  Avas  no  more  in  the  power  of  Parlia- 
ment to  make  the  kingdom  richer  by  calling  a  crown  a  pound  than  to 
make  the  kingdom  larger  by  calling  a  furlong  a  mile.  He  seriously 
believed,  incredible  as'it  may  seem,  that  if  the  ounce  of  silver  were 
divided  into  seven  shillings  instead  of  five,  foreign  nations  would 
sell  us  their  wines  and  their  silks  for  a  smaller  number  of  ounces. 
He  had  a  considerable  following,  composed  partly  of  dull  men  who 
really  believed  what  he  told  them,  and  partly  of  shrewd  men  who 
were  perfectly  willing  to  be  authorized  by  law  to  pay  a  hundred 
pounds  with  eighty.  Had  his  arguments  prevailed,  the  evils  of  a 
vast  confiscation  would  have  been  added  to  the  other  evils  which 
afflicted  the  nation :  public  credit,  still  in  its  tender  and  sickly 
infancy,  would  have  been  destroyed,  and  there  woidd  have  been 
much  risk  of  a  general  mutiny  of  the  fleet  and  army.  Happily, 
liowndes  was  completely  refuted  by  Locke  in  a  paper  drawn  up  for 
the  use  of  Somers.  Somers  was  delighted  with  this  little  treatise, 
and  desired  that  it  might  be  printed.  It  speedily  became  the  text 
book  of  all  the  most  enlightened  politicians  in  the  kingdom,  and 
may  still  be  read  with  pleasure  and  profit."  ^ 

The  proposition  of  Lowndes  was  for  a  recoinage  of  the  cur- 
rency with  one-fifth  less  metal  than  the  standard  of  the  old 
coins  ;  to  raise,  to  use  liis  own  words,  "  the  value  of  the  silver 
in  the  coins  to  the  foot  of  6s.  Bd.  in  everv  crown,  because  the 
price  of  standard  silver  in  bullion  is  risen  to  68.  5d.  an  ounce." 
Bullion,  when  purchased  and  paid  for  in  the  debased  coins,  had 
risen  in  ratio  to  their  depreciation ;  in  other  words,  five  light 
coins  were  required  to  purchase  a  given  weight  of  bullion 
which  could  have  been  purchased  by  four  coins  of  full  weight. 
Locke  was  called  upon  to  prove,  and  did  prove  most  conclu- 
sively, that  equal  weights  of  silver  were  equal  in  value  to 
equal  weights  of  equal  fineness ;  and,  consequently,  that 
nothing  could  be  gained,  at  home  or  abroad,  by  altering  the 
standard,  as  the  coins,  both  at  home  and  abroad,  would  pass 
only  at  their  value  measured  by  weight  and  fineness.  It 
would  seem  that  the  conclusions  to  which  Locke  came  might 
have  been  assumed  as  axioms,  from  which  he  might  have 
commenced  his  argument.     If  so,  the  statement  of  the  ques- 

1  Macaulay's  "  History  of  England,"  vol.  iv. 


JOHN   LOCKE.  79 

tion  contains  its  own  answer.  Locke  was  not  content  with 
this.  He  prepared  a  pamphlet  of  more  than  a  hundred  pages, 
in  which  he  reenforced  his  argument  by  a  wealth  and  conclu- 
siveness of  illustration  which  should  have  put  the  question 
for  ever  at  rest.  He  did,  indeed,  carry  the  government  with 
him,  but  by  no  means  the  conviction  of  mankind.  Strange  as 
it  may  seem,  he  is,  as  will  be  hereafter  shown,  the  only  writer 
except  Law,  upon  the  subject  of  currency,  who  has  not  as- 
sumed, much  less  attempted  to  prove  that  two  and  two  make 
five.  At  the  time  that  he  wrote,  the  Bank  of  England  had  just 
gone  into  operation,  and  his  attention  was  only  called  to  the 
subject  of  metallic  money.  He  appears  to  have  been  the  only 
person  that  has  ever  had  any  thing  like  correct  ideas  as  to  its 
nature  and  functions,  and  there  can  be  little  doubt  that,  had 
he  sufficiently  pursued  the  inquiry,  he  would  have  unfolded 
its  true  laws.  He  not  only  stands  alone  in  the  position  he 
undertook  to  demonstrate,  but  he  committed  another  unpar- 
donable offence  with  the  Schoolmen  in  asserting,  to  use  the 
words  of  Adam  Smith,  '•  that  gold  and  silver  are  the  most 
solid  and  substantial  part  of  the  movable  capital  of  a  nation  ;  " 
or,  to  quote  the  words  of  Locke  himself,  that  "  the  only  way 
to  bring  treasure  into  England  is  the  well  ordering  of  our 
trade  ;  and,  further,  that  the  only  way  to  bring  silver  and  gold 
to  the  Mint,  for  the  increase  of  our  stock  of  money  and  treas- 
ure which  shall  stay  here,  is  the  overbalance  of  our  whole 
trade.  All  other  ways  to  increase  our  money  and  riches  are 
but  projects  that  will  fail  as."  ^ 

The  plan  of  relief  finally  adopted  by  the  English  govern- 
ment provided  that  the  money  of  the  kingdom  should  be  re- 
coined  according  to  the  old  standard  of  weight  and  fineness ; 
that  all  the  pieces  should  be  milled,  and  that  the  loss  on  the 
clipped  pieces  should  be  borne  by  the  puljlic.  A  time  was 
fixed  after  which  no  chpped  money  should  pass,  except  in 
payments  to  the  government,  and  a  later  time  after  which  it 
should  not  pass  at  all.  To  provide  for  the  loss  on  the  chpped 
coins,  the  Bank  of  England  undertook,  on  the  security  of  the 
window  tax,  to  advance  the  government  «£  1,200,000.  This 
advance,  however,  afforded  but  a  partial  relief.     Full  relief 

1  Locke's  Works,  vol.  v.  p.  253. 


80  HISTORY   OF  MONETARY  THEORIES. 

could  only  be  had  when  the  new  silver  (the  metal  then 
chiefly  in  circulation)  came  in  in  sufficient  abundance  to  fill 
up  the  vacuum  made  by  calling  in  the  old. 

"  Satiirflay,  the  second  of  May,"  (1696),  continues  Lord  Macaulay, 
"  had  been  fixed  as  the  last  day  on  which  the  clipped  crowns,  half- 
crowns,  and  shilHngs  were  to  be  received  by  tale  in  payment  of 
taxes.  The  Exchequer  was  besieged  from  dawn  till  midnight'  by 
an  immense  multitude.  It  was  necessary  to  call  in  the  guards  for 
the  purpose  of  keeping  order.  On  the  following  Monday  began  a 
cruel  agony  of  a  few  months,  which  was  destined  to  be  succeeded 
by  many  years  of  almost  unbroken  prosperity. 

"Most  of  the  old  silver  had  vanished.  The  new  silver  had 
scarcely  made  its  appearance.  About  £4,000,000,  in  ingots  and 
hammered  coin,  were  lying  in  the  vaults  of  the  Exchequer;  and 
the  milled  money  as  yet  came  forth  very  slowly  from  the  Mint. 
Alarmists  predicted  that  the  wealthiest  and  most  enlightened  king- 
dom in  Europe  would  be, reduced  to  the  state  of  those  barbarous 
societies  in  which  a  mat  is  bought  with  a  hatchet,  and  a  pair  of  moc- 
casins with  a  piece  of  venison.  There  were,  indeed,  some  hammered 
pieces  which  had  escaped  mutilation,  and  sixpences  not  clipped 
within  the  innermost  ring  were  still  current.  This  old  money  and 
the  new  money  together  made  up  a  scanty  stock  of  silver,  which, 
with  the  help  of  gold,  was  to  carry  the  nation  through  the  summer. 
The  manufacturers  generally  continued,  though  with  extreme  diffi- 
culty, to  pay  their  workmen  in  coin.  The  upper  classes  seem  to 
have  lived  to  a  great  extent  on  credit.  Even  an  opulent  man  seldom 
had  the  means  of  discharging  the  weekly  bills  of  liis  baker  and 
butcher.  A  promissory  note,  however,  subscribed  by  such  a  man, 
was  readily  taken  in  the  district  where  his  means  and  character 
were  well  known.  The  notes  of  the  wealthy  money-changers  of 
Lombard  Street  circulated  widely.  The  paper  of  the  Bank  of 
Enoland  did  much  service.  .  .  . 

"  The  directors  soon  found  it  impossible  to  procure  silver  to  meet 
CA^ery  claim  which  Avas  made  on  them  in  good  faith.  They  then  be- 
thought them  of  a  new  expedient.  They  made  a  call  of  twenty  per 
cent  on  the  proprietors,  and  thus  raised  a  sum  which  enabled  them 
to  give  every  apjilicant  fifteen  per  cent  in  milled  money  on  what 
was  due  to  him.  They  returned  him  his  note,  after  making  a 
minute  upon  it  that  part  had  been  paid.  A  few  notes  thus  marked 
are  still  preserved  among  the  archives  of  the  Bank,  as  memorials  of 
that  terrible  year.  The  paper  of  the  corporation  continued  to  cir- 
culate ;  but  the  value  fluctuated  violently  from  day  to  day,  and 
indeed  from  hour  to  hour ;  for  the  public  mind  was  in  so  excitable 
a  state  that  the  most  absurd  lie  which  a  stock-jobber  could  invent 
sufiiced  to  send  the  price  up  or  down.  At  one  time  the  discount 
was  only  six  per  cent,  at  another  time  twenty-four  per  cent.  A 
ten-pound  note,  which  had  been  taken  in  the  morning  as  worth 
more  than  nine  pounds,  was  often  worth  less  than  eight  pounds 
before  night.  .  .  . 


JOHN   LAW.  81 

"  Meanwhile,  streni;ous  exertions  were  making  to  hasten  the  re- 
coinage.  Since  the  Restoration,  the  Mint  had,  like  every  other  pub- 
lic establishment  in  the  kingdom,  been  a  nest  of  idlers  and  jobbers. 
The  important  office  of  Warden,  worth  between  six  and  seven  hun- 
dred a  year,  had  become  a  mere  sinecure,  and  had  been  filled  by  a 
succession  of  fine  gentlemen  who  were  well  known  at  the  hazard- 
table  at  Whitehall,  but  who  never  condescended  to  come  near  the 
Tower.  This  office  had  just  become  vacant,  and  Montague  had 
obtained  it  for  Xewton.  The  ability,  the  industry,  and  the  strict 
uprightness  of  the  great  philosopher  speedily  produced  a  complete 
revolution  throughout  the  department  which  was  under  his  direc- 
tion. He  devoted  himself  to  his  task  with  an  activity  which  left 
him  no  time  to  spare  for  those  pursuits  in  which  he  had  surpassed 
Archimedes  and  Galileo.  Till  the  great  work  was  completely  done, 
he  resisted  firmly,  and  almost  angrily,  every  attempt  that  was  made 
by  men  of  science,  either  here  or  on  the  Continent,  to  draw  him 
away  from  his  official  duties.  The  old  officers  of  the  Mint  had 
thought  it  a  great  feat  to  coin  silver  to  the  amount  of  fifteen  thou- 
sand pounds  a  week.  When  Montague  talked  of  thirty  or  forty 
thousand,  these  men  of  form  and  precedent  pronounced  the  thing 
impracticable.  But  the  energy  of  the  young  Chancellor  of  the  Ex- 
chequer and  of  his  friend  the  Warden  accomplished  far  greater 
wonders.  Soon  nineteen  mills  were  going  at  once  in  the  Tower. 
As  fast  as  men  could  be  trained  to  the  work  in  London,  bands  of 
them  were  sent  off  to  other  parts  of  the  kingdom.  Mints  were 
established  at  Bristol,  York,  Exeter,  Norwich,  and  Chester.  This 
arrangement  was  in  the  highest  degree  popular.  The  machinery 
and  the  workmen  were  welcomed  to  the  new  stations  with  the  ring- 
ing of  bells  and  the  firing  of  guns.  The  weekly  issue  increased  to 
sixty  thousand  pounds,  to  eighty  thousand,  to  a  hundred  thousand, 
and  at  length  to  a  hundred  and  tM-enty  thousand.  Yet  even  this 
issue,  though  great,  not  only  beyond  jirecedent,  but  beyond  hope, 
was  scanty  when  compared  with  the  demands  of  the  nation.  Xor 
did  all  tlie  newly  stamped  silver  pass  into  circulation  ;  for  during 
the  summer  and  autumn  those  politicians  who  were  for  raising  the 
denomination  of  the  coin  were  active  and  clamorous  ;  and  it  was 
generally  expected  that,  as  soon  as  Parliament  should  reassemble, 
the  standard  would  be  lowered.  Of  course,  no  person  who  thought 
it  ]>robable  that  he  should,  at  a  day  not  far  distant,  be  able  to  pay  a 
debt  of  a  pound  with  three  crown  pieces  instead  of  four,  was  willing 
to  part  with  a  crown  piece  till  that  day  arrived.  Most  of  the  nailled 
pieces  were,  therefore,  hoarded.  May,  June,  and  July  passed  away 
without  any  perceptible  increase  in  the  quantity  of  good  money. 
It  was  not  till  August  that  the  keenest  observer  could  discern  the 
first  faint  signs  of  returning  prosperity. 

Immediately  following  Locke,  came  the  celebrated  John 
Law,  who,  about  the  year  1700,  published  a  treatise  entitled 
"  Money  and  Trade  Considered,"'  the  object  of  which  was  to 
show  that  articles  of  property,  other  than  silver,  —  the  money 

6 


82  HISTORY   OF  MONETARY   THEORIES. 

then  chiefly  in  circulation,  —  might  be  made  into  money,  or 
might  be  made  the  basis  for  the  issue  of  a  paper  money  in 
place  of  one  of  silver,  to  the  great  advantage  of  the  public, 
and  particularly  of  Scotland,  his  own  country,  then  one  of  the 
poorest  in  Europe.  Law  possessed  an  acute  intellect,  which, 
when  not  influenced  by  the  purposes  he  had  in  view,  was  ca- 
pable of  mastering  almost  any  subject  toward  which  it  might  be 
directed.  "  The  value  of  silver  as  money,"  he  says,  "  is  its  value 
in  barter."  This  statement  covered  the  whole  ground.  In 
his  familiarity  with  financial  affairs,  in  the  clearness  and  vigor 
of  his  style,  and  in  liis  knowledge  of  the  principles  of  metallic 
money,  he  has  no  superior  but  Locke.  He  is,  in  fact,  the  one 
who,  next  to  Locke,  can  be  studied  with  most  interest  and 
profit.  Had  he  done  no  more  than  to  write  his  "  Money  and 
Trade  Considered,"  he  would  now  be  regarded  as  an  oracle 
of  wisdom,  instead  of  being,  a^  he  is,  an  object  of  universal 
obloquy  and  contempt.  He  was  a  remarkable  instance  of  the 
union  of  an  idealist  and  a  man  of  affairs.  There  is  every  rea- 
son to  believe  that  he  was  prompted  by  a  sincere  desire  to  pro- 
mote the  welfare  of  liis  species.  That  he  left  France  in  a  state 
of  utter  destitution,  although  he  might  have  laid  aside  millions 
after  seeing  his  ruin  to  be  inevitable,  —  a  fact  which  he  urged  in 
vindication  of  his  motives,  however  much  his  judgment  might 
have  been  at  fault,  —  is  at  least  proof  of  the  disinterested- 
ness of  his  nature. 

"  It  is  reasonable  to  think,"  says  Law,  "  silver  was  bartered  as  it 
was  valued  for  its  uses  as  a  metal,  and  was  given  as  money  accord- 
ing to  its  value  in  barter.  The  additional  use  of  money  silver  was 
applied  to  would  add  to  its  value,  because  as  money  it  remedied 
the  disadvantages  and  inconveniences  of  barter,  and  consequently, 
the  demand  for  silver  increasing,  it  received  an  additional  value 
equal  to  the  greatest  demand  its  use  as  money  occasioned. 

"And  this  additional  value  is  no  more  imaginary  than  the  value 
silver  had  in  barter  as  a  metal ;  for  such  value  was  because  it  served 
such  uses,  and  was  greater  or  lesser  according  to  the  demand  for 
silver  as  a  metal  proportioned  to  its  quantity.  The  additional  value 
silver  received  from  being  used  as  money  was  because  of  its  quali- 
ties which  fitted  it  for  that  use,  and  that  value  was  according  to  the 
additional  demand  its  use  as  money  occasioned. 

"  If  either  of  these  values  are  imaginary,  then  all  value  is  so ;  for 
no  goods  have  any  value  but  from  Uie  uses  they  are  applied  to, 
and  according  to  the  demand  for  them,  in  proportion  to  their 
quantity.  .  .  . 

"  Money  is  not  a  pledge,  as  some  call  it ;  it  is  a  value  paid,  or 


JOHN  LATV^.  83 

contracted  to  be  paid,  with  wHch  it  is  supposed  the  receiver  may, 
as  his  occasions  require,  buy  an  equal  quantity  of  the  same  goods 
he  has  sold,  or  other  goods  equal  in  value  to  them ;  and  that  money 
is  the  most  secure  value  either  to  receive,  to  contract  for,  or  to 
value  goods  by,  which  is  least  liable  to  change  in  its  value.  .  .  . 

"  Thus  silver  having  a  value  and  qualities  fitting  it  for  money, 
which  other  goods  had  not,  was  made  money,  and,  for  the  greater 
use  of  the  people,  was  coined."  ^ 

Law  was  entirely  right  in  assuming  that  the  value  of  silver 
was  its  value  in  barter.  He  was  mistaken,  however,  in  assert- 
ing that  it  derives  a  value  from  its  use  as  money,  unless  by 
its  use  as  money  he  meant  its  use  as  reserves.  The  value  of 
the  precious  metals  in  barter  is  made  up  of  their  value  in  the 
arts  and  their  value  as  reserves.  A  person  possessing  perish- 
able property  seeks  to  convert  it  into  that  which  has  a  more 
permanent  value.  K  he  can  find  something  that  is  imperish- 
able and  at  the  same  time  in  universal  demand,  he  will  pay  for 
it  a  price  greater  than  its  value  in  the  arts  ;  in  other  words, 
the  value  of  gold  and  silver,  as  determined  by  their  value  in 
the  arts,  would  be  less  than  it  is,  were  it  not  for  the  demand 
for  them  as  reserves.  It  is  not  their  use  as  a  medium  of  ex- 
change that  constitutes  their  value  :  it  is  their  value  in  the  arts 
and  their  capacity  to  serve  as  reserves  that  give  them  their 
value  in  exchange.  They  are  simply  used  as  money  from  their 
value  for  other  purposes.  To  say  that  they  are  valuable  be- 
cause they  are  used  as  money,  is  only  saying  that  they  are  val- 
uable in  barter  because  they  are  used  in  barter. 

Although  silver  was  the  money  in  use,  and  although  its  value 
as  such  was  its  value  in  barter,  Law,  to  provide  a  way  for  his 
new  money,  proceeded  to  show  that  the  former,  though  in  use, 
was  very  poorly  adapted  to  serve  as  money :  — 

"  Silver  money  is  more  uncertain  in  its  value  than  other  goods, 
so  less  qualified  to  serve  as  money. 

"  Goods  of  the  same  kind  and  quality  differ  in  value  from  any 
change  in  their  quahty,  or  in  the  demand  for  them.  In  either  of 
these  cases  goods  are  said  to  be  dearer,  or  cheaper,  being  more  or 
less  valuable,  and  equal  to  a  greater  or  lesser  quantity  of  other 
goods,  or  of  money. 

"  Silver  in  bulhon  or  money  changes  its  value  from  any  change  in 
its  quantity,  or  in  the  demand  for  it.  In  either  of  these  cases  goods 
are  said  to  be  dearer  or  cheaper ;  but  'tis  silver  or  money  is  dearer 

1  Money  and  Trade  Considered,  Chap.  I. 


84  HISTORY  OF  MONETARY   THEORIES. 

or  cheaper,  being  more  or  less  valuable,  and  equal  to  a  greater  or 
lesser  quantity  of  goods. 

"  Perishable  goods,  as  corns,  &c.,  increase  or  decrease  in  quantity 
as  the  demand  for  them  uacreases  or  decreases ;  so  their  value  con- 
tinues equal  or  near  the  same. 

"More  durable  goods,  as  metals,  materials  for  shipping,  &c., 
increase  in  quantity  beyond  the  demand  for  them,  so  are  less 
valuable."  ^ 

The  preceding  paragraphs  contain  assumptions  which  are 
exactly  opposed  to  the  fact.  The  value  of  silver  is  uniform 
from  the  uniformity  of  its  production  and  of  the  demand  for 
it.  Should  there  be  some  excess  in  production  for  one  or 
more  years,  such  excess  would  be  taken  up  at  previous  prices 
to  be  held  as  reserves  (so  long  as  silver  is  legalized  as  money). 
A  large  increase  of  production  will  be  absorbed  in  this  man- 
ner. Unlike  other  merchandise,  the  market  for  silver  is  the 
world.  Until  the  markets  of  the  world  are  glutted,  it  cannot 
fall  materially  in  value  from  increase  of  production.  Corn  is 
an  indispensable  article  of  food  ;  but  corn-consuming  countries 
are  corn-producing  countries.  The  greater  part  of  the  excess 
in  one  country  must  be  consumed  witliin  the  country  produc- 
ing it.  It  cannot,  from  its  perishable  nature,  be  held  as  re- 
serves. As  the  amount  of  product  depends  upon  the  seasons, 
and  as  it  may  be  twice  as  great  in  one  year  as  it  was  in  the 
one  preceding,  its  market  value  will  be  somewhat  in  ratio  to 
its  quantity ;  in  other  words  will  fluctuate  violently  from  year 
to  year.  Metals  and  materials  for  ship-building  are  produced 
very  slowly,  and,  as  they  can  be  held  without  injury  for  long 
periods,  their  prices  are  much  more  uniform  than  those  of 
most  articles  of  food,  which  must  presently  be  consumed  or 
become  valueless  to  their  holder.  Although  at  the  outset 
some  of  Law's  propositions  in  reference  to  money  were  emi- 
nently sound,  he  was  compelled  to  sacrifice  them  so  soon  as  he 
began  to  unfold  his  scheme.  Those  who  came  after  him  were 
incapable  of  appreciating  him  where  he  was  right,  but  were 
certain  to  follow  him  wherever  he  was  wrong.  It  was  from 
him  that  Adam  Smith  got  the  doctrine  which  he  asserted  with 
so  much  emphasis,  that  corn  was  a  better  measure  of  value 
than  coin.  Like  Adam  Smith,  aU  the  Economists  have  bor- 
rowed greatly  from  Law,  from  whom,  from  the  disgrace  at- 

1  Money  and  Trade  Considered,  Chap.  V. 


JOHK  LAW.  85 

tached  to  his  name,  they  could  copy  without  reference  and 
with  impunity.  They  constructed,  in  great  measure,  from  the 
ruins  he  left  behind,  their  grotesque  and  absurd  edifices.  Ma- 
terials which  he  put  together  in  a  symmetrical  manner  were 
by  them  wholh^  misconceived  and  misapplied. 

The  substitute  for  silver  money  proposed  by  Law  was  a 
paper  money  based  upon  lands.  To  provide  for  its  issue  Par- 
liament was,  — 

"  1.  To  authorize  the  Commission  to  lend  notes  on  land  security, 
the  debt  not  exceeding  one-half  or  two-thirds  of  the  value,  and  at 
the  ordinary  interest. 

"  2.  To  give  out  the  full  price  of  land,  as  it  is  valued,  20  years' 
purchase,  more  or  less,  according  to  what  it  would  have  given  in  sil- 
ver money ;  the  Commission  entering  into  possession  of  such  lands 
by  wadset  granted  to  the  Commission  or  assignees,  and  redeemable 
betwixt,  and  the  expiring  of  a  term  of  years. 

"  3.  To  give  the  full  price  of  land  upon  sale  made  of  such  lands, 
and  disi>osed  to  the  Commission  or  assignees  irredeemably.  .  .  . 

"  The  paper  money  proposed  will  be  equal  in  value  to  silver,  for 
it  will  have  a  value  of  land-pledge  equal  to  the  same  sum  of  silver 
money,  that  is  given  out  for.  If  any  losses  should  happen,  one- 
fourth  of  the  revenue  (interest  on  the  notes)  issued  of  the  commis- 
sion will,  in  all  appearance,  be  more  than  sufficient  to  make  them 
good. 

"  This  paper  money  will  not  fall  in  value  as  silver  money  has 
fallen,  or  may  fall :  goods  or  money  fall  in  value  if  they  increase  in 
quantity,  or  if  the  demand  lessens.  But  the  Commission  giving 
out  what  sums  are  demanded,  and  takincj  back  what  sums  are 
offered  to  be  returned,  this  paper  money  will  keep  its  value,  and 
there  will  always  be  as  much  money  as  there  is  occasion  or  employ- 
ment for,  and  no  more.  .  .  . 

"  Land  has  a  more  certain  value  than  other  goods,  for  it  does  not 
increase  in  quantity,  as  all  other  goods  may.  The  uses  of  goods 
may  be  discharged,  or  by  custom  be  taken  from  them,  and  given  to 
other  goods  :  the  use  of  bread  may  be  taken  from  oats  and  wholly 
given  to  wheat ;  the  use  of  money  may  be  taken  from  silver  and 
given  to  land ;  the  use  of  plate,  and  the  other  uses  of  silver,  as  a 
metal,  may  be  taken  from  silver  and  given  to  some  other  metal 
or  some  mixture  that  may  be  more  fitted  for  these  uses.  In  any  of 
these  cases  these  goods  lose  a  part  of  their  value,  proportioned  to 
the  uses  that  are  taken  fi-om  them;  but  land  cannot  lose  any  of  its 
uses.  For  as  every  thing  is  produced  by  land,  so  the  land  must  keep 
its  value,  because  it  can  be  turned  to  produce  the  goods  that  are  in 
use.  If  wheat  is  more  used,  and  oats  less,  as  the  land  can  pro- 
duce both,  it  will  be  turned  to  produce  what  is  most  used,  because 
most  valuable."  ^  .  .  . 

1  Money  and  Trade  Considered,  Chap.  VII. 


86  mSTOKY  OF   MONETARY  THEOEIES. 


What  would  be  the  object  of  borrowers  in  getting  Law's 
land  notes  ?  Not  land,  for  they  could  get  that  by  direct  pur- 
chase. Their  object  would  be  to  obtain  coin,  or  merchandLse, 
the  equivalent  of  colq,  —  capital  that  could  be  used  in  their 
industries.  Unless  they  could  obtain  one  or  the  other  of  these, 
they  would  not  receive  the  notes,  gi^-ing  their  own  obligations 
therefor.  They  could  not  come  into  the  possession  of  the 
lands  by  which  the  notes  were  secured,  as  these  would  be  held 
by  the  Commission  issuing  the  notes.  The  latter,  consequently, 
would  be  simply  forms  of  debt,  and  to  be  realized  upon  would 
have  to  be  sold  in  open  market,  and,  certainly,  at  a  very  great 
discount.  As  the  borrower  would  have  to  give  his  own  bills 
equal  in  amount  to  the  notes  received,  he  might  be  giving  that 
which  might  be  valuable  for  that  which  might  be  almost 
wholly  worthless.  Whether,  therefore,  the  notes  were  well 
secured  or  not,  they  could  never  get  into  circulation.  To  get 
out  of  this  dilemma,  Law  was  obliged  to  assume,  to  use  his  own 
words,  that, — 

"  Money  is  not  the  value  for  which  goods  are  exchanged,  but  the 
value  by  which  they  are  exchanged.  The  use  of  money  is  to  buy 
goods  ;  and  silver,  while  money,  is  of  no  other  use."  ^ 

In  developing  his  scheme.  Law  had,  undoubtedly,  all  the 
time,  a  sort  of  consciousness  that  his  land  money  would  not  be 
received  in  exchange  for  other  articles.  As  he  could  not  give 
up  his  scheme,  his  piinciples  had  to  give  way  to  his  necessities, 
and  he  was  forced  to  assert  the  exact  opposite  to  that  which 
he  had  affirmed,  and  the  truth  of  which  he  had  conclusively 
demonstrated.  Money,  consequently,  "was  not  the  value  for 
which  goods  were  exchanged,  but  the  value  hy  wliich  they  were 
exchanged."  It  was  the  yardstick  by  which  goods  were  meas- 
ured off,  —  a  contrivance  to  assist  in  numeration,  —  a  tally  or 
counter  to  register  the  delivery  of  certain  quantities  or  values 
of  merchandise ;  in  other  words,  value  was  not  a  necessary 
attribute  of  money. 

"  Though  silver  were  our  product,"  says  Law,  "  yet  it  is  not  so 
proper  to  be  made  money  as  land.     Land  is  what  produces  every 

1  Money  and  Trade  Considered,  Chap.  VII. 


JOHN  LAW.  87 

thing  ;  silver  is  only  the  product.  Land  does  not  increase  or  de- 
crease in  quantity;  silver  or  any  other  product  may:  so  land  is 
more  certain  in  its  value  than  silver  or  any  other  goods. 

"  Laud  is  capable  of  improvement,  and  the  demand  for  it  may  be 
greater ;  so  it  may  be  more  valuable.  Silver  cannot  be  supposed  to 
be  applied  to  any  other  uses  than  it  is  now  apj^lied  to,  or  that  the  de- 
mand will  increase  more  than  the  quantity. 

"Land  cannot  lose  any  of  its  uses,  so  will  not  be  less  valuable. 
Silver  may  lose  the  uses  of  money  it  is  now  applied  to,  and  so  be 
reduced  to  its  value  as  a  metal. 

"  It  may  likewise  lose  a  part  of  its  uses  as  a  metal,  these  uses  be- 
ing supplied  by  other  goods  ;  so  loses  a  part  of  its  value  as  a  metal ; 
but  nothing  can  supply  the  uses  of  land. 

"  Land  may  be  conveyed  by  paper,  and  thereby  has  the  other 
qualities  necessary  in  money,  in  a  greater  degree  than  silver. 

"  Land  has  other  qualities  fitting  it  for  the  use  of  money  that 
silver  has  not. 

"  Land  applied  to  the  use  of  money  does  not  lose  any  other  uses 
it  is  applied  to  ;  silver  cannot  serve  the  use  of  money  and  any  of 
its  other  uses  as  a  metal.  .  .  . 

"  When  a  nation  establishes  a  money,  if  the  money  they  set  up 
have  a  value  equal  to  what  it  is  made  money  for,  and  all  the  other 
qualities  necessary  in  money,  they  ought  to  have  no  regard  what 
lvalue  it  will  have  in  other  countries.  On  the  contrary,  as  every 
country  endeavors  by  laws  to  preserve  their  money,  if  that  people 
can  conti'ive  a  money  that  will  not  be  valued  abroad,  they  will  do 
what  other  countries  have  by  laws  endeavored  in  vain. 

"  No  nation  keeps  to  silver  because  it  is  used  in  other  countries : 
it  is  because  they  can  find  nothing  so  safe  and  convenient.  Trade 
betwixt  nations  is  carried  on  by  exchange  of  goods,  and  if  one 
merchant  sends  out  goods  of  a  less  value  than  he  brings  home,  he 
has  money  furnished  him  abroad  by  another  who  brings  home  for  a 
less  value  than  he  sent  out.  If  there  is  no  money  due  abroad,  then 
the  merchant  who  designed  to  import  for  a  greater  value  than  he 
exported  is  restricted,  and  can  only  import  equal  to  his  export ; 
which  is  all  the  many  laws  to  regulate  trade  have  been  en- 
deavoring." ^ 

From  what  has  been  shown  in  that  part  of  this  work  which 
treats  of  the  Laws  of  Money,  it  would  be  superfluous  here  to 
controvert  Law's  assumption  that  whatever  possesses  value 
can  be  made  into  money ;  or  that  real  property  is  the  best 
basis  of  money  because  the  least  liable  to  fluctuate  in  value. 
A  mortgage  on  real  propertj^  may  possess  a  high  value,  and  yet 
have  no  other  attributes  fitting  it  to  serve  as  money.  The 
assertion  that  a  nation  should  have  no  regard,  in  its  money,  to 
its  trade  with  others,  was  undoubtedly  wholly  false  to  Law 

1  Money  and  Trade  Considered,  Chap.  VII. 


88  HISTORY   OF  MOISTETAEY  THEORIES. 

in  his  sober  moments.  He  saw  that  his  paper  money  would 
never  pass  abroad.  He  was  driven  consequently  to  assert  that 
it  was  not  necessary  that  it  ever  should  pass  abroad ;  that  the 
domestic  trade  of  a  nation  was  alone  to  be  considered.  He 
took  the  short  cut  of  throwing  his  principles  overboard  with- 
out the  least  compunction,  whenever  they  came  into  conflict 
with  his  purposes.  He  was  a  man  of  action,  who  never 
stopped  to  explain,  but  pushed  right  forward  to  the  object  he 
had  in  view.  For  him  to  doubt  and  inquire  would  be  to  give 
up  the  contest  altogether.  His  life  was  a  mission  to  promote, 
in  the  first  place,  the  welfare  of  his  own  country,  by  supi)lying 
it  with  money  —  capital ;  and  every  consideration  was  subor- 
dinate to  this  grand  idea. 

Law  found  no  one  who  would  entertain  his  schemes  for  a 
Land  Bank.  He  succeeded,  however,  in  1716,  in  establishing, 
in  France,  a  Bank  with  a  cash  capital  of  6,000,000  francs, 
which  he  appears  to  have  conducted,  so  long  as  he  was  able  to 
keep  clear  of  government,  in  a  safe  and  legitimate  manner. 
The  great  want  of  France  at  the  time  was  precisely  the  insti- 
tution which  Law  succeeded  in  establisliing.  Her  finances 
were  in  a  most  disorganized  condition.  The  securities  of 
government  were  hardly  worth  one-third  their  nominal  value. 
Her  metallic  currency  had  been  constantly  tampered  with,  by 
reducing  its  value,  in  order  to  enable  the  government  to  pay 
its  debts  at  one-half  or  one-third  the  value  at  which  they 
were  contracted.  From  the  social  disorder  which  prevailed,  it 
was  in  the  highest  degree  hazardous  to  forward  coin  from  one 
province  to  another.  Law  undertook  to  make  the  notes  he 
issued  payable  in  coin  at  its  value  at  the  time  they  were  issued, 
and  as  he  promptly  paid  them  on  presentation,  they  soon  be- 
gan to  be  preferred  to  coin,  which  was  liable  at  any  moment 
to  be  debased  in  value  by  a  royal  edict.  His  notes  soon 
attained  circulation  in  the  provinces,  as  they  were  received 
with  coin  in  the  payment  of  the  revenues  of  government.  His 
Bank  had  hardly  been  in  operation  a  year  before  the  most 
striking  and  beneficial  consequences  were  everywhere  appar- 
ent. Trade  was  greatly  improved,  the  revenues  of  the  govern- 
ment were  incx'eased,  and  were  more  promptly  paid,  and  Law 
was  hailed  as  the  benefactor,  if  not  the  saviour,  of  the  nation. 
Having  found,  at  last,  an  adequate  theatre  for  the  exercise  of 
the  great  abilities  which  he  undoubtedly  possessed,  Law  seems 


DAVID   HUaiE.  89 

to  have  forgotten  bis  Land  Bank  schemes  altogether.  He  was 
accustomed  to  affirm  that  every  banker  who  issued  notes  with- 
out proper  provision  for  their  conversion  into  coin  was  deserv- 
ing of  death.  He  hekl,  however,  that  his  notes  could  be  made 
the  basis  of  industrial  enterprises,  in  addition  to  being  the 
instruments  for  the  distribution  of  that  which  enterprise  and 
industry  had  already  produced.  His  Bank,  therefore,  became 
the  guarantor  for  the  success  of  all  such  undertakings.  If 
these  failed,  its  capital  became  responsible  for  the  loss  sustained. 
Acting  upon  this  principle,  he  held  that  Banks  should  engage 
in  all  kinds  of  commercial  and  industrial  pursuits ;  that  they 
should,  in  fact,  in  imitation  of  the  great  monopolies  which 
governments  at  the  time  were  accustomed  to  grant,  merge  in 
themselves  the  whole  commerce  and  industry  of  the  nation. 
Here  was  his  fundamental  error,  and  here  the  rock  on  which 
he  made  final  shipwreck.  One  of  his  great  projects  was  the 
Mississippi  scheme,  the  greatest  "  Bubble  "  the  world  ever  saw, 
which  at  last  involved  Law,  his  Bank,  and  France  herself,  in 
a  common  ruin.  An  account  of  this,  as  well  as  of  Law's 
operations,  does  not  come  witliin  the  object  of  this  work. 

From  the  publication  of  Law's  "Money  and  Trade  Con- 
sidered," the  subject  of  money  attracted  little  attention  till 
1752,  when  Mr.  Hume  published  his  "Essays  on  Civil  and 
Political  Economy."  The  Bank  of  England  went  on  its  even 
way,  discounting  business  paper  at  the  rate  of  five  per  cent, 
a  rate  that  was  hardly  changed  for  a  generation.  In  Hume, 
Aristotle  found  a  pupil  worthy  the  master,  with  this  difference : 
Aristotle  was  one  of  the  most  truthful  of  men,  while  Avith 
Hume  truth  was  a  matter  of  secondary  importance.  There  is 
an  earnestness  in  Aristotle  which  attracts  our  sympathy,  if 
it  does  not  command  our  assent.  There  is  a  want  of  earnest- 
ness in  Hume  that  repels  our  s}Tnpathy,  even  if  we  cannot 
controvert  his  conclusions.  Hume,  like  Aristotle,  assumed  all 
his  premises  without  consideration  or  reflection,  and  disposed, 
by  a  single  stroke  of  his  pen,  of  questions,  to  solve  which  by 
any  proper  method  a  lifetime  might  hardly  suffice. 

"  Money,"  says  Hume  (by  which  he  means  gold  and  silver),  "  hav- 
ing chiefly  a  fictitious  value,  the  greater  or  less  plenty  of  it  is  of  no 
consequence.^  ...  It  is  not,  properly  speaking,  one  of  the  subjects 

1  Hume's  Works,  Essay  on  Interest  (Am.  ed.),  vol.  iii.  x>.  325. 


90  HISTORY  OF    MONETARY  THEORIES. 

of  commerce,  but  only  the  instrument  which  men  have  agreed  upon 
to  facilitate  the  exchange  of  one  commodity  for  another.  It  is 
none  of  the  wheels  of  trade :  it  is  the  oil  which  renders  the  motion 
of  the  wheels  more  smooth  and  easy.  If  we  consider  any  one 
kingdom  by  itself,  it  is  evident  that  the  greater  or  less  plenty  of 
money  is  of  no  consequence.^  ...  It  is  only  the  public  (govern- 
ment) which  draws  any  advantage  from  the  greater  plenty  of 
money,  and  that  only  in  its  wars  and  negotiations  with  foreign 
States.^  .  .  .  The  greater  the  number  of  people,  and  their  greater 
industry  are  serviceable  in  all  cases  at  home  and  abroad,  in  private 
and  in  public.  But  the  greater  plenty  of  money  is  very  limited  in 
its  use,  and  may  even  sometimes  be  a  loss  to  the  nation  in  its  com- 
merce with  foreigners.^  .  .  .  And,  in  general,  we  may  observe  that 
the  dearness  of  every  thing,  from  plenty  of  money,  is  a  disadvantage 
which  attends  an  established  commerce,  and  sets  bounds  to  it  in 
every  country  by  enabling  the  poorer  States  to  undersell  the  richer 
in  all  foreign  markets.  This  has  made  me  to  entertain  a  doubt  con- 
cerning the  benefit  of  Banks  and  paper  credits.*  .  .  .  That  provisions 
and  labor  should  become  dear  by  an  increase  of  trade  and  money,  is 
in  many  respects  an  inconvenience,  but  an  inconvenience  that  is  un- 
avoidable, and  the  effect  of  that  public  wealth  and  prosperity  which 
are  the  end  of  all  our  wishes.  It  is  compensated  by  the  advan- 
tages which  we  reap  from  the  possession  of  these  precious  metals, 
and  the  weight  which  they  give  the  nation  in  all  foreign  wars  and 
negotiations.  But  there  appears  to  be  no  reason  for  increasing  that 
inconvenience  by  a  counterfeit  money  which  foreigners  will  not 
accept  of  in  any  payment,  and  which  any  great  disorder  in  the  State 
will  reduce  to  nothing.^  .  .  .  And  in  this  view  it  must  be  allowed 
that  no  Bank  could  be  more  advantageous  than  such  a  one  as 
locked  up  all  the  money  it  received  (as  was  the  case  with  the  Bank 
of  Amsterdam),  and  never  augmented  the  circulating  coin,  as  is 
usual,  by  returning  a  part  of  its  treasure  into  commerce.  A  public 
Bank  by  this  expedient  might  cut  off  much  of  the  dealings  of 
private  bankers  and  money-jobbers;  and  though  the  State  bore  the 
charge  of  their  salaries  to  directors  and  tellers  of  this  Bank  (for 
according  to  the  preceding  supposition  it  would  have  no  profit 
from  its  dealings),  the  national  advantage  resulting  from  the  lower 
price  of  labor  and  the  destruction  of  paper  credit  would  be  a 
sufficient  compensation.'  .  .  . 

"  It  was  a  shrewd  observation  of  Anacharsis,  the  Scythian,  who 
had  never  seen  money  in  his  own  country,  that  gold  and  silver 
seemed  to  him  of  no  use  to  the  Greeks  but  to  assist  them  in  numer- 
ation and  arithmetic.  It  is,  indeed,  evident  that  money  is  nothing 
but  the  representation  of  labor  and  commodities,  and  serves 
only  as  a  method  of  rating  or  estimating  them.  ...  It  can  have 
no  effect,  either  good  or  bad,  taking  the  nation  within  itself ;  any 
more  than  it  would  make  an  alteration  upon  the  merchant's  books 

1  Essay  on  Money,  vol.  iii,  p.  309.  ^  n,id. 

8  Ibid.  p.  310.  *  Ibid.  p.  311. 

6  Ibid.  e  Ibid.  p.  312. 


DAVID  HUME.  "  91 

if,  instead  of  the  Arabian  method  of  notation,  which  requires  few 
characters,  he  should  make  use  of  the  Roman,  which  requires  a  great 
many.  Nay,  the  greater  quantity  of  money,  like  the  Roman  charac- 
ters, is  rather  inconvenient,  and  requires  greater  trouble  to  keep  and 
transport  it.  But,  notwithstanding  this  conclusion,  which  must  be 
allowed  just,  it  is  certain  that  since  the  discovery  of  the  mines  of 
America  industry  has  increased  in  all  the  countries  of  Europe, 
except  in  the  possessors  of  those  mines,  and  this  may  justly  be 
ascribed,  among  other  things,  to  the  increase  of  gold  and  silver. 
.  .  .  This  is  not  easily  accounted  for  if  we  consider  only  the  in- 
fluence which  a  greater  abundance  of  coin  has  in  the  kingdom 
itself,  by  heightening  the  price  of  commodities,  and  obliging  every 
one  to  pay  a  greater  number  of  these  little  yellow  or  white  pieces 
for  every  thing  he  has  to  purchase.  And  as  to  foreign  trade  it 
appears  that  a  plenty  of  money  is  rather  disadvantageous  by  rais- 
ing the  price  of  every  kind  of  labor."  ^ 

Hume  followed  Law  where  the  latter  was  wrong,  and  re- 
jected him  wherever  he  was  right.  The  value  of  money,  he 
tells  us,  is  fictitious ;  its  greater  or  less  quantity,  therefore,  is 
of  no  consequence  ;  notliing  is  to  be  gained  by  increasing  the 
dimensions  of  a  fiction ;  it  is  not  valuable  to  a  country  in  its 
commerce,  for  it  is  not  the  subject  of  commerce,  only  the  oil 
which  lubricates  its  wheels.  Is  not  that  a  subject  of  commerce, 
the  possession  of  which  is  the  great  object  of  commerce,  and  in 
which  all  the  profits  or  balances  arising  in  commerce  are  pay- 
able ?  According  to  Hume,  its  quantity  becomes  of  importance 
only  in  negotiations  and  wars  with  other  countries.  But  if  it 
were  a  fiction  in  England  when  he  wrote,  why  was  it  not  a  fic- 
tion in  France,  with  which  England  was  at  war  ?  Is  it  a  law  of 
human  nature  that  that  which  is  a  pure  fiction  in  one  country 
should  be  solid  reality  in  another  ?  Is  not  that  valuable  wliich 
every  people  seek  to  obtain  by  exchanging  therefor  whatever 
they  possess  ;  and  which  will  always,  at  its  cost,  command  all 
other  kinds  of  propert}'-  ? 

In  all  respects,  except  in  wars  and  negotiations,  the  abun- 
dance of  money,  says  Hume,  may  be,  and  often  is,  a  disadvan- 
tage, as  prices  are  raised  thereby  in  ratio  to  its  abundance. 
In  this  way,  poor  countries  having  no  money  are  enabled  to 
undersell  the  rich  having  a  great  deal  of  money,  and  drive  them 
out  of  their  accustomed  markets.  The  exact  reverse  of  all  this 
is  the  truth.  Prices  are  either  low  in  ratio  to  the  abundance  of 
money,  or,  what  is  the  same  thing,  the  amount  which  a  people 

1  Essay  on  Money,  pp.  313,  314. 


92  HISTORY   OF    MOXETAEY  THEORIES. 

are  able  to  consume  is  in  ratio  to  such  abundance.  Cocoa- 
nuts  are  very  cheap  in  the  interior  of  Africa,  and  dates  in  the 
interior  of  Arabia  ;  but  the  people  of  those  countries  may  con- 
sume nothing  but  cocoa-nuts  and  dates.  They  have  no  means 
of  purchasing  other  articles,  because  the}-  have  no  means  of 
transporting  that  which  they  possess  to  markets  where  it  would 
have  a  high  value.  Had  they  plent}'  of  money,  merchants 
could  afford  to  supply  them  at  very  low  rates  from  the  cer- 
tainty of  being  paid.  With  such  people,  therefore,  the  price 
of  all  imported  articles  would  be  in  inverse  ratio  to  the  amount 
of  their  money.  So  with  a  symbolic  currency,  —  with  paper 
money.  This  is  the  representative  of  capital.  If  one  be 
abundant  the  other  must  be ;  and,  if  abundant,  prices  must  be 
low,  for  prices  are  high  or  low  in  ratio  to  the  abundance 
or  want  of  the  articles  to  which  they  relate.  Whatever  tlie 
form  of  money  or  currency,  therefore,  the  greater  the  abun- 
dance, the  lower  are  prices.  If  merchandise  that  is  made 
the  basis  of  production  be  low,  tlie  price  of  the  product  must 
be  low.  Cheapness  of  production  is  always  in  ratio  to  the 
abundance  of  means  applicable  thereto.  Rich  nations  can, 
and  always  do,  undersell  the  poorer,  by  force  of  natural 
laws.  Does  Spain  undersell  England,  or  Mexico  the  United 
States,  in  the  markets  of  the  world  ?  Paper  credits  —  that  is 
currencies  —  issued  by  Banks  are  one  of  the  most  important 
conditions  of  low  prices,  as  the}'  serve  as  the  cheapest  possible 
means  of  distribution. 

There  is  some  compensation,  says  Hume,  for  the  inconven- 
ience of  too  great  an  abundance  of  coin,  that  it  can  be  used  in 
foreign  wars,  but  Bank  jjaper  can  never  be  used  out  of  the 
country  in  which  it  is  issued.  No  reason,  therefore,  can 
be  urged  to  palliate  its  issue.  But  does  not  the  cost  of  articles 
used  in  foreign  wars,  other  than  coin,  exceed  tenfold  that  of  the 
coin  required  ?  If  they  can  be  had  by  means  of  paper  money, 
equally  with  coin,  does  not  the  former  possess  for  the  govern- 
ment the  same  value  as  coin  ?  Hume  would  have  all  Banks  like 
the  Bank  of  Amsterdam,  or  an  improvement  upon  that  Bank. 
His  Banks  should  collect  every  thing  into  their  vaults,  and  let 
nothing  out !  But  how,  in  such  case,  are  exchanges  to  be 
effected  ?  There  must  be  either  coin  or  s}Tiibols,  or  all  com- 
merce must  speedily  come  to  a  dead  stand.  In  such  event,  a 
people,  in  the  course  of  a  few  months,  would  be  reduced  to  the 
very  brink  of  ruin. 


DAVID   HUJIE.  93 

With  Hume,  gold  and  silver  derive  their  importance  to  a 
nation  solely  from  their  use  in  its  wars  and  negotiations. 
Considered  by  itself,  their  abundance  is  of  no  consequence 
whatever.  Suppose  all  people  constituted  one  nation,  would 
not  gold  and  silver  be  held  in  the  same  esteem  and  possess 
the  same  value  that  they  do  with  the  vast  number  of  nation- 
alities and  races  which  exist  ?  Would  they  not  appeal  in  the 
same  way  to  the  sense  of  beauty  in  man?  Would  they  not 
have  the  same  value  in  the  arts  ?  Would  they  not  still  be  the 
most  valuable  of  all  kinds  of  property  ?  and  by  virtue  of  such 
value  serve  as  reserves  in  which  all  accumulations  are  to  be 
held,  whether  in  possession,  or  in  loans  at  interest?  When 
the  first  lump  of  gold  was  exchanged  for  some  other  article  of 
property,  did  the  person  who  received  it  consider  that  the 
profit  of  the  exchange  would  depend  upon  the  value  of  his 
gold  in  countries  other  than  his  own?  Hume  might  just  as 
well  have  affirmed  that  the  only  importance  and  value  of  iron 
was  in  dealing  with  other  nations ;  that  to  a  nation  considered 
by  itself  it  was  of  no  consequence  whatever. 

Hume  asserts  the  value  of  money  to  be  imaginary,  and  at  the 
same  time  that  a  great  abundance  of  it  is  injurious  by  raising 
the  price  of  commodities.  But  what  constitutes  the  value 
of  any  article  ?  The  amount  of  demand  that  exists  for  it. 
There  can  be  no  other  test  or  measure.  We  can  form  no 
idea  of  the  value  of  any  article  but  by  comparing  it  with 
that  of  some  other.  If  it  have  no  exchangeable  value,  it 
has  no  value.  It  may  have  uses,  without  having  values. 
The  water  that  a  person  drinks  from  a  river  is  useful  in 
sustaining  his  life,  but  it  has  no  value  in  the  proper  sense  of 
the  term.  An  imaginary  value,  therefore,  is  no  value  ;  so  that 
the  very  foundation  upon  which  Hume  erected  his  argument 
has  no  existence  whatever.  Only  that  which  possesses  value 
can  affect  the  value  of  other  things.  If  money  had  no  value, 
its  greater  or  less  abundance  could  exert  no  influence  what- 
ever on  the  value  or  price  of  other  articles.  A  little  thouglit 
and  reflection  would  have  shown  all  this,  but  this  way  was 
not  Hume's  way.  Reflection  and  analysis  are  laborious  and 
painful  processes,  to  which  he  was  by  no  means  inclined.  To 
truth  he  was  wholly  indifferent.  His  object  was  effect,  pro- 
vided that  could  be  produced  by  very  little  labor  and  pains. 


94  HISTOEY   OF  MOKETARY  THEORIES. 

"  Were  all  our  money,  for  instance,  recoined,"  says  Hume,  "  and 
a  penny's  worth  of  silver  taken  from  every  shilling,  the  new  shil- 
ling would  probably  purchase  every  thing  that  could  have  been 
bought  with  the  old;  the  prices  of  every  thing  would  be  in- 
sensibly diminished  ;  foreign  trade  enlivened  ;  and  domestic  indus- 
try, by  the  circulation  of  a  greater  number  of  pounds  and  shillings, 
would  receive  some  increase  and  encouragement.  In  executing 
such  a  project,  it  would  be  better  to  make  the  new  shilling  pass  for 
twenty-four  half-pence,  in  order  to  preserve  the  illusion,  and  to 
make  it  be  taken  for  the  same.  And  as  the  recoinage  of  our  silver 
begins  to  be  requisite  by  the  continual  wearing  of  our  shillings  and 
sixpences,  it  may  be  doubtful  whether  we  ought  to  imitate  the  ex- 
ample in  King  William's  reign,  when  the  clipped  money  was  raised 
to  the  old  standard."  ^ 

Never  did  a  person  draw  a  more  graphic  picture  of  himself 
than  did  Hume  in  the  preceding  paragraph.  He  would 
debase  money,  and  at  the  same  time  maintain  its  value.  He 
would  maintain  its  value,  and  at  the  same  time  derive  an  ad- 
vantage from  its  debasement  in  diminishing  prices.  In  the 
same  sentence,  the  value  of  money  was  to  be  both  maintained 
and  reduced.  From  diminished  prices  at  home,  foreign  trade 
was  to  be  enlivened,  and  domestic  trade  receive  some  increase 
and  encouragement  from  the  greater  number  of  pounds  and 
shillings  in  circulation.  But  how  could  more  pounds  and  sliil- 
lings  be  in  circulation,  if  the  debased  coins  would  purchase 
as  much  as  those  of  full  weight  and  value  ?  In  executing  the 
project  it  would  be  better,  he  says,  to  make  the  "  new  shilling 
pass  for  twenty-four  half-pence,  in  order  to  preserve  the 
illusion  and  make  it  be  taken  for  the  same  ;  "  and  he  suggests 
that  at  the  next  coinage  his  project  should  be  carried  out, 
naively  remarking,  that  it  was  doubtful  whether  King  Wil- 
liam's example  in  restoring  the  coinage  should  be  followed. 
With  Hume,  from  the  perversity  or  credulity  of  human  nat- 
ure, a  falsehood  plausibly  told,  and  well  stuck  to,  would  have 
all  the  potency  of  truth.  Of  this,  his  own  works  afford  a 
memorable  illustration.  He  contrived  by  artful  fabrications 
to  falsify  the  whole  course  of  English  history,  and  to  make  the 
world  believe,  almost  for  a  century,  that  slavery,  not  freedom, 
was  the  birthright  of  Englishmen.  Any  one,  by  taking  the 
pains,  might  easily  have  shown  that  his  history  must  have  been 
wholly  untrustworthy,  from  the  careless  and  flippant  manner 
in  which  he  wrote  upon  other  subjects. 

1  Essay  on  Money,  p.  316. 


DAVID   HUME.  95 

"  The  necessary  effect  is,"  he  continues,  "that,  provided  the  money- 
increase  not  in  a  nation,  every  thing  must  become  much  cheaper 
in  times  of  industry  and  refinement,  than  in  rude  and  uncultivated 
ages.  It  is  the  proportion  between  the  circulating  money  and  the 
commodities  in  the  market  which  determines  the  prices.  .  .  .  But 
after  money  enters  into  all  contracts  and  sales,  and  is  everywhere 
the  measure  of  exchange,  the  same  national  cash  has  a  much  greater 
task  to  perform  :  all  commodities  are  in  the  market ;  the  sphere 
of  circulation  is  enlarged ;  it  is  the  same  case  as  if  that  individual 
sum  were  to  serve  a  larger  nation  ;  and,  therefore,  the  proportion 
being  here  lessened  on  the  side  of  the  money,  every  thing  must  be- 
come cheaper  and  the  prices  gi'adually  fall.  "  ^ 

The  degree  of  wealth  of  a  people  depends  upon  their  means 
of  distribution.  The  one  must  always  be  in  ratio  to  the 
other.  Their  money  must  increase  as  their  industries  increase, 
by  a  law  as  inexorable  as  that  of  gravity.  Hume's  assump- 
tion, therefore,  that  wealth  and  industry  may  increase,  the 
amount  of  money  remaining  unchanged,  is  to  assume  a  half 
to  equal  the  whole.  His  plan  for  benefiting  the  public  by 
reducing  prices,  by  reducing  the  amount  of  mone}-,  is  equiva- 
lent to  taking  off  one-half  of  the  cars  from  a  railroad,  where 
the  whole  had  only  sufficed  for  its  operations.  Such  a  process 
would  reduce  greatly  the  price  or  value  of  merchandise  to  the 
producer.  It  would,  at  the  same  time,  add  very  largely  to  the 
price  paid  by  the  consumer.  Both  would  be  equally  injured 
by  the  restricted  capacity  of  the  instrument  of  distribution. 
The  former  would  receive  much  less;  the  latter  would  pay 
much  more.  So  with  money.  With  its  decrease,  production 
would  decrease  in  far  greater  ratio.  With  such  decrease,  cost 
of  production  would  increase.  These  are  not  assertions,  but 
laws.  By  Hume's  reasoning,  money  has  only  to  be  abolished 
altogether  to  have  prices  reach  their  minimum,  or  rather  for 
merchandise  to  have  no  value  at  all. 

"  I  scarcely  know  any  method,"  he  continues,  "  of  sinking  money 
below  its  level,  but  those  institutions  of  Banks,  Funds,  and  Paper 
Credit,  which  are  so  much  practised  in  this  kingdom.  These  render 
paper  equivalent  to  money,  circulate  it  throughout  the  whole  State, 
make  it  supply  the  place  of  gold  and  silver,  raise  proportionably  the 
price  of  labor  and  commodities,  and  by  that  aieans  either  banish  a 
great  part  of  those  precious  metals,  or  prevent  their  further  in- 
crease. What  can  be  more  short-sighted  than  our  reasonings  on  this 
head  ?  We  fancy,  because  an  individual  would  be  much  richer  were 

i  Essay  on  Money,  p.  320. 


96  HISTORY  OF   MONETARY  THEORIES. 

his  Stock  of  money  doubled,  that  the  same  good  effect  would  follow 
were  the  money  of  every  one  increased ;  not  considering  that  this 
would  raise  as  much  the  price  of  every  commodity,  and  reduce 
every  man  in  time  to  the  same  condition  as  before.  It  is  only  in 
our  public  negotiations  and  transactions  with  foreigners  that  a 
greater  stock  of  money  is  advantageous  ;  and  as  our  paper  is  there 
absolutely  insignificant,  we  feel,  by  its  means,  all  the  ill  effects  aris- 
ing from  a  groat  abundance  of  money  without  reaping  any  of  the 
advantages."  ^ 

"  Suppose  there  are  £12,000,000  of  paper  which  circulate  in  this 
kingdom  as  money ;.  .  .  .  and  suppose  the  real  cash  of  the  kingdom 
to  be  £18,000,000.  Here  is  a  state  which  is  found  by  experience 
to  be  able  to  hold  a  stock  of  £30,000,000.  I  say,  if  it  be  able 
to  hold  it,  it  must  of  necessity  have  acquired  it  in  gold  and  sil- 
ver, had  we  not  obstructed  the  entrance  of  these  metals  by  this 
new  invention  of  paper.  Whence  would  it  have  acquired  that 
sum?  From  all  the  kingdoms  of  the  world.  But  why?  Because 
if  you  remove  these  £12,000,000,  money  in  this  state  is  below  its 
level  compared  with  its  neighbors,  and  we  must  immediately  draw 
from  all  of  them,  till  we  be  full  and  saturate,  so  to  speak,  and  can 
hold  no  more.  By  our  present  politics  we  are  as  caretid  to  stuff  the 
nation  with  this  fine  commodity  of  baiik  bills,  and  cheque-notes, 
as  if  we  were  afraid  of  being  overburdened  with  the  precious 
metals."  ^  .  .  . 

"  What  a  pity  Lycurgus  did  not  think  of  paper  credit  when  he 
wanted  to  banish  gold  and  silver  from  Sparta !  It  would  have 
served  his  purpose  better  than  the  lumps  of  iron  he  made  use 
of  as  money  ;  and  would  have  prevented  more  effectually  all  com- 
merce with  strangers."  ^ 

"  These  institutions  of  Banks  and  Paper  Credits  render  paper 
the  equivalent  of  money,"  says  Hume.  It  is  the  capital  such 
paper  represents  that  makes  it  the  equivalent  of  money.  By 
representing  capital,  and  serving  in  the  place  of  coin  as  the 
means  of  its  distribution,  it  reduces  instead  of  "  raising  propor- 

1  Essay  on  Balance  of  Trade,  p.  307. 

2  Ibid.,  vol.  iii.  p.  348.  As  Aristotle  deduced  the  laws  of  money  from  the 
baseness  of  its  uses,  it  is  not  improbable  that  Hume  reasoned,  or  was  biased,  in 
a  similar  manner.  He  was  a  thorough  Tory,  holding  the  trading  and  mechanic 
classes  in  indifference,  if  not  contempt,  which,  like  that  of  Aristotle,  may  have 
attached  itself  to  their  methods  and  implements.  It  was  natural  that  he  should 
have  a  Tory's  spite  against  the  Bank  of  England,  as  it  was  founded  by  the 
King  and  Parliament  that  expelled  the  Stuarts,  to  vindicate  and  uphold  whom 
was  the  great  object  of  his  life  ;  and  as  the  Bank  was  one  of  the  greatest  sup- 
porters of  liberal  principles  and  of  constitutional  government  in  England. 
"With  such  sentiments,  he  was  much  more  likely  to  utter  a  sneer,  than  to  enter 
upon  an  inquiry  which  would  show  the  Bank  to  be  one  of  the  most  beneficent 
instruments  in  promoting  the  progress  of  the  nation. 

»  Ibid.  p.  349. 


DAVID   HUME.  97 

tionably  the  price  of  labor  and  commodities."  His  assumption 
consequently  is  exactly  opposed  to  the  fact.  "We  fancy," 
he  says,  "  because  an  individual  would  be  much  richer  were 
his  stock  of  money  doubled,  that  the  same  good  effect  would 
follow  were  the  money  of  every  one  increased."  But  would 
not  every  one  be  richer  by  having  his  money  doubled  ?  If  it 
were  in  coin,  it  could  be  used  as  capital,  and  its  possessor's 
means  of  consumption  be  doubled.  Its  price  at  home  would 
be  regulated  by  its  price  the  world  over,  so  that  an  increase 
in  its  amount  in  any  one  country  would  by  no  means  affect  in 
like  ratio,  and  permanently,  the  price  of  other  commodities. 
Suppose  the  iron  and  breadstuffs  in  a  community  to  be  doubled, 
would  it  not  be  all  the  better  off?  If  a  symbolic  currency  be 
doubled,  would  it  not  be  e\ddence  that  the  means  of  consump- 
tion were  doubled  ?  What  is  wealth  but  an  abundance  of  such 
means  ?  With  Hume,  money  was  not  capital  at  home  while  it 
was  capital  abroad.  It  is  the  highest  form  of  capital  at  home, 
for  the  reason  that  it  is  the  highest  form  of  capital  abroad. 

With  Hume,  the  evil  of  paper  money  is,  that  it  displaces  a 
corresponding  amount  of  coin, — sinks  it  below  its  level,  com- 
pared with  other  countries.  How  did  he  ascertain  this  ?  Eno-- 
land,  at  the  time  he  wrote,  with  ^18,000,000  of  coin  and 
X12,000,000  of  bank  notes,  might  have  had  more  than  its  share 
of  coin.  Its  paper  currency,  by  assisting  in  the  exchanges, 
may  have  secured  to  it  a  larger  amount  of  coin  than  it  would 
have  had  without  such  currency.  His  assumption,  therefore, 
that  the  notes  in  circulation  replaced  a  corresponding  amount 
of  coin  is  wholly  gratuitous.  It  is  from  this  assumption,  how- 
ever, that  Economists  have  drawn  their  celebrated  dogma  or 
axiom  that  the  proper  measure  of  issue  of  paper  money  is  the 
amount  of  gold  that  would  have  been  in  circulation  but  for 
such  issue  ;  overlooking  the  fact  that  paper  money  is  not 
based  upon  coin  so  much  as  upon  merchandise ;  and  that  the 
amount  of  the  coin  of  a  nation  is  to  be  measured  not  by  that 
which  it  possesses,  but  by  that  which  it  can  command.  Eng- 
land may  not  have  so  much  coin  within  her  borders  as  France 
has  mthin  hers :  but  in  England  every  coin  that  can  be  spared 
is  loaned.  Her  money  is  in  every  quarter  of  the  globe.  Were 
her  loans  all  called  in,  she  would  have  an  amount  of  coin  far 
exceeding  that  which  France  could  command.  The  latter 
country  is  the  land  of  revolutions,  and  the  greater  part  of  the 

7 


98  HISTORY    OF    MONETARY   THEORIES. 

population  prefer,  for  their  better  security,  to  keep  their  own 
cash,  instead  of  intrusting  it  to  Banks  or  bankers. 

Hume  was  one  of  the  earliest  writers  to  refer  to  the  subject 
of  currency  to  be  issued  by  Banks.  An  opportimity  was  thus 
opened  to  him,  had  he  chosen,  by  unfolding  its  nature  and 
laws,  of  performing  a  substantial  service  for  mankind.  He 
preferred  to  talk  rather  than  to  investigate,  —  to  appear  wise 
and  learned  rather  than  to  be  so.  The  Bank  of  England,  when 
he  wrote,  had  been  in  operation  nearly  sixty  years,  and  the 
currency  it  then  issued  was  precisely  similar  in  kind  to  that 
issued  at  the  present  day.  He  had,  therefore,  every  condition 
necessary  to  the  scientific  investigation  of  money  in  all  its 
forms.  The  establishment  of  the  Bank  was  an  era  not  only 
in  the  history  of  money,  but  in  that  of  the  race.  It  was  the 
first  attempt,  on  any  considerable  scale,  to  symbolize  merchan- 
(Jise,  —  to  provide  instruments  of  distribution  other  than  coin. 
Nothing  was  better  fitted  to  excite  interest  and  investigation 
than  the  nature  of  such  instruments.  It  seems  marvellous 
that  no  adequate  attempt  at  their  analysis  should  ever  have 
been  made.  This  is  very  largely  due  to  the  influence  exerted 
by  Hume.  As  the  reputation  enjoyed  b}-  Aristotle  forbade  all 
investigation  of  the  truth  of  his  dogmas,  and  secured  for  them 
immunity  through  the  ages,  so  Hume  impressed  himself  so 
strongly  upon  the  opinions  of  mankind  as  to  be  received, 
for  nearly  a  century,  as  authority  upon  most  of  the  subjects 
upon  which  he  \\Tote,  although  his  works  were  full  of  errors 
and  falsifications.  He  is  still  constantly  quoted,  with  appro- 
bation, upon  the  knotty  points  of  monetary  science  ;  although, 
as  far  as  any  knowledge  of  the  subject  was  concerned,  a  Kaffir 
might  as  well  be  quoted  for  an  authoritative  opinion  upon  the 
Code  of  Menu. 

The  anomalous  character  of  the  Bank  of  England  has  un- 
doubtedly opposed  a  very  serious  obstacle  to  progress  in  mone- 
tary science.  It  was  founded  not  so  much  to  provide  more 
convenient  instruments  of  distribution  and  exchange,  as  to 
supply  the  necessities  of  government,  of  which  it  has,  since  its 
organization,  been  one  of  the  most  important  departments.  Its 
mixed  or  double  functions,  as  an  issuer  of  currency  and  as  the 
fiscal  agent  of  the  government,  have  been  well  calculated  to 


ADAM   S]\nTH.  99 

avert  attention  from  its  real  nature,  with  wliich  its  relation  to 
the  latter  had  nothing  to  do.  Its  success  is  a  striking  illustra- 
tion of  the  naturalness  and  necessity  of  its  functions  as  an 
instrument  of  commerce.  It  was,  fortunately,  at  the  outset, 
restricted  in  its  dealings  to  commercial  bills,  and  was  re- 
quired to  pay  all  claims  upon  it,  on  demand,  in  coin.  It 
needed  no  book  or  instruction  to  teach  an  Englishman  to  demand 
gold  and  silver  in  payment  of  whatever  might  be  due  him,  — 
to  act  like  a  man  of  sense,  whatever  may  have  been  told  him 
in  books,  —  to  teach  the  first  managers  of  the  Bank  that  the 
only  way  in  which  they  could  avoid  paying  out  coin  in  taking 
in  their  notes  was  to  issue  them  only  in  the  discount  of  sol- 
vent bills,  and  that  the  only  competent  evidence  of  solvency 
was  that  bills  were  given  for  merchandise  in  demand  for  con- 
sumption. The  liberties  of  Englishmen  have  not  been  got  out 
of  books,  nor  maintained  by  any  fine-spun  theories  as  to  the 
value  of  freedom,  but  by  a  stolid  determination  on  the  part  of 
each  one  to  enjoy  whatever  he  possessed  in  the  manner  that 
best  suited  him.  To  this  the  whole  nation  have  clung  with 
bull-dog  tenacity,  deaf  to  all  threats  or  appeals  of  Church 
or  State.  It  is  almost  the  only  right  sacred  in  their  eyes. 
The  only  way  in  which  their  government  could  exert  ^ower 
was  by  the  possession  of  money  ;  and  the  only  way  by  which 
it  could  come  into  possession  of  money  was  through  the  vol- 
untary gifts  of  the  people.  As  each  one  used  his  own  in  his 
own  way,  the  freest  play  was  given  to  the  peculiarities  of  each ; 
and,  out  of  such  free  play,  whatever  is  great  or  good  in  the 
nation  has  sprung. 

From  Hume  we  have  no  writer  of  eminence  on  the  subject 
of  currency  till  we  come  to  Adam  Smith,  who  published  his 
celebrated  work  on  the  "  Wealth  of  Nations,"  in  1776,  twenty- 
four  years  after  the  publication  of  Hume's  "  Civil  and  Politi- 
cal Essays."  The  latter  were  simply  monographs  upon  various 
questions  included  in  the  general  term  of  Political  Economy. 
Smith  undertook  to  treat  the  whole  subject  scientifically,  and, 
including  his  work  on  the  Moral  Sentiments,  to  map  out  and 
classify  all  the  motives  which  influence  human  action. 

"In  the  '  Moral  Sentiments,'"  says  Buckle,  "  Smith  investigates 
the  sympathetic  part  of  human  nature  ;  in  the  '  Wealth  of  Nations,' 
he  investigates  the  selfish  part.     And  as  all  of  us  are  sympathetic  as 


100  HISTORY  OF  MONETARY   THEORIES. 

well  as  selfish  ;  in  other  words,  as  all  of  us  look  without  as  well  as 
within,  and  as  this  classification  is  a  primary  and  exhaustive  divi- 
sion of  our  motives  to  action  ;  it  is  evident,  that  if  Adam  Smith 
had  completely  accomplished  his  vast  design,  he  would  at  once  have 
raised  the  study  of  human  nature  to  a  science,  leaving  nothing  for 
subsequent  inquirers  except  to  ascertain  the  minor  springs  of  affairs, 
all  of  which  would  find  their  place  in  this  general  scheme,  and  be 
deemed  subordinate  to  it.  In  his  attempt  to  perform  this  prodigious 
task,  and  to  traverse  the  enormous  field  which  he  saw  lying  before 
him,  he  soon  perceived  that  an  inductive  investigation  was  impossi- 
ble, because  it  would  require  the  labor  of  many  lives  even  to  assem- 
ble the  materials  from  which  the  generalization  was  to  be  made. 
Moved  by  these  reflections,  and  probably  moved  still  more  by  the 
intellectual  habits  which  prevailed  around  him,  he  resolved  on 
adopting  the  deductive  method  instead  of  the  inductive."  ^ 

It  will  thus  be  seen  that  Smith  attempted  an  infinitely  wider 
task  than  Aristotle,  and  by  precisely  similar  methods.  The 
latter  had  no  conception  whatever  of  those  great  questions 
which  now  engross  the  attention  of  mankind.  He  had  no  idea 
of  social  and  moral  progress  as  its  highest  condition  and  law. 
For  the  ancients  humanity  had  no  claims.  Aristotle  was  un- 
able to  raise  himself  above  the  low  level  of  his  age  and  race. 
When  his  attention  was  turned  to  physical  phenomena,  the 
great  field  open  to  him,  he  could,  for  the  want  of  adequate 
methods,  make  no  progress  whatever.  If  with  so  few  ques- 
tions, compared  with  those  which  pressed  upon  Smith,  Aris- 
totle made  such  an  utter  and  disastrous  failure,  how  was  it  to 
be  expected  that  the  former,  M-ith  no  better  methods,  with  a 
far  less  acute  intellect,  and  with  infinitely  more  numerous  and 
difficult  problems,  could  otherwise  than  share  the  fate  of  his 
great  master  ?  The  objects  as  well  as  the  methods  of  the  two 
were  almost  precisely  similar.  Aristotle  undertook  to  con- 
struct an  universal  science,  and  to  pronounce  authoritatively 
upon  every  subject  coming  within  the  range  of  human  observa- 
tion, —  subjects  for  the  solution  of  a  vast  number  of  which,  a 
lifetime,  with  the  best  of  training  and  helps,  would  have  been 
far  too  short.  The  still  vaster  undertaking  of  Smith  left  him 
no  alternative  but  to  apply  the  Aristotelian  method  —  that 
of  dialectics  —  to  subjects  which  yield  only  to  the  most  pa- 
tient analysis,  and  in  this  way,  by  a  stroke  of  his  pen,  to  dis- 
pose of  questions  which  have  required  years,  if  not  cycles,  to 
solve.     Like  those  of  Aristotle,  liis  teachings  upon  some  of  the 

1  History  of  Civilization  in  England,  vol.  ii.  page  341,  American  edition. 


ADAM   SMITH.  IQl 

most  important  subjects  that  concern  the  welfare  of  the  race 
have  been  accepted  without  reserve,  while  the  comments  upon 
them  by  his  followers  have  only  served  to  perpetuate,  and  in- 
volve in  still  greater  uncertainty  and  confusion,  the  errors  and 
absurdities  they  contain. 

It  conies  within  the  scope  of  this  work  to  discuss  only  that 
part  of  Smith's  "  Wealth  of  Nations  "  that  relates  to  the  sub- 
ject of  money.  Of  the  origin  and  nature  of  this  he  gives  the 
following  account :  — 

"  When  the  division  of  labor  has  been  thoroughly  established,  it  is 
but  a  very  small  part  of  man's  wants  which  the  produce  of  his  own 
labor  can  supply.     He  supplies  the  far  greater  part  of  them  by  ex- 
changing that  surplus  part  of  the  produce  of  his  own  labor,  which 
is  over  and  above  his  own  consumption  for  such  part  of  the  produce 
of  other  men's  labor  as  he  has  occasion  for.     Every  man  thus  lives 
by  exchanging,  or  becomes  in  some  measure  a  merchant ;  and  society 
itself  grows  to  be  what  is  properly  a  commercial  society.     But, 
when  the  division  of  labor  first  began  to  take  place,  this  power  of 
exchanging  must  frequently  have  been  very  much  clogged  and  em- 
barrassed in  its  operations.     One  man,  we  shall  suppose,  has  more 
of  a  certain  commodity  than  he  himself  has  occasion  for,  while  an- 
other has  less.     The  former,  consequently,  would  be  glad  to  dispose 
of,  and  the  latter  to  purchase,  a  part  of  this  superfluity.     But,  if 
this  latter  should  chance  to  have  nothing  that  the  former  stands  in 
need  of,  no  exchange  can  be  made  between  them.     The  butcher 
has  more  meat  in  his  shop  than  he  himself  can  consume,  and  the 
brew^er  and  the  baker  would  each  of  them  be  willing  to  purchase  a 
part  of  it ;  but  they  have  nothing  to  offer  in  exchange  except  the 
different  productions  of  their  respective  trades,  and  the  butcher  is 
already  provided  with  all  the  bread  and  beer  which  he  has  imme- 
diate occasion  for.     No  exchange  can,  in  this  case,  be  made  between 
them.     He  cannot  be  their  merchant,  nor  they  his  customers ;  and 
they  are  all  of  them  thus  mutually  less  serviceable  to  one  another. 
In  order  to  avoid  the  inconvenience  of  such  situations,  every  pru- 
dent man,  in  every  period  of  society,  after  the  first  establishment  of 
the  division  of  labor,  must  naturally  have  endeavored  to  manage 
his  affairs  in  such  a  manner  as  to  have  at  all  times  by  him,  besides 
the  peculiar  produce  of  his  own  industry,  a  certain  quantity  of  some 
one  commodity  or  other,  such  as  he  imagined  few  people  would  be 
likely  to  refuse  in  exchange  for  the  produce  of  their  industry. 

"  Many  different  commodities,  it  is  probable,  were  successively 
both  thought  of  and  employed  for  this  purpose  of  exchange.  In 
the  rude  ages  of  society,  cattle  are  said  to  have  been  the  instrument 
of  commerce,  and  though  they  must  have  been  a  most  inconvenient 
one,  yet,  in  old  times,  we  find  things  were  frequently  valued  accord- 
ing to  the  number  of  cattle  which  had  been  given  in  exchange  for 
them.     The  arms  of  Diomede,  says  Homer,  cost  only  nine  oxen, 


102  HISTORY   OF  MONETARY   THEORIES. 

but  that  of  Glaucus  cost  an  hundred  oxen.  Salt  is  said  to  be  the 
common  instrument  of  commerce  and  'exchanges  in  Abyssinia ;  a 
species  of  shells  in  some  parts  of  the  coast  of  India ;  dried  cod  at 
Ne^^-f  oundland ;  tobacco  in  Virginia  ;  sugar  in  some  of  our  "West 
India  colonies  ;  hides,  or  dressed  leather,  in  some  other  countries ; 
and  there  is  at  this  day  a  village  in  Scotland  where  it  is  not  uncom- 
mon, I  am  told,  for  a  workman  to  carry  nails,  instead  of  money,  to 
the  baker's  shop  or  to  the  ale-house. 

"  In  all  countries,  however,  men  seem  at  last  to  have  determined, 
by  irresistible  reasons,  to  give  preference  to  metals  above  every 
commodity.  Metals  can  be  not  only  kept  with  as  little  loss  as 
any  other  commodity,  scarce  any  thing  being  less  perishable  than 
they  are,  but  they  can  likewise,  without  any  loss,  be  divided  into 
any  number  of  parts,  as  by  fusion  those  parts  can  easily  be  re- 
united again,  —  a  quality  xohich  no  other  equally  durable  commodi- 
ties possess^  and  ichic/i,  more  than  any  other  qualities,  renders  them 
Jit  to  be  the  instruments  of  commerce  and  circulatioji.  .  .  . 

"Different  metals  have  been  made  use  of  by  different  nations  for 
this  purpose.  Iron  was  the  common  instrument  of  commerce  among 
the  ancient  Spartans  ;  copper  among  the  ancient  Romans ;  gold  and 
silver  among  all  rich  and  commercial  nations.  .  .  . 

"  The  use  of  the  metals  in  their  rude  state  was  attended  with  two 
very  considerable  inconveniences :  first,  the  trouble  of  weighing, 
and,  secondly,  that  of  assaying  them.  In  the  precious  metals, 
where  a  small  difference  in  the  quantity  makes  a  great  differ- 
ence in  value,  even  the  business  of  weighing  with  proper  exact- 
ness requires  at  least  very  accurate  weights  and  scales.  .  .  .  The 
operation  of  assaying  is  still  more  difficult  and  still  more  tedious. 
...  To  prevent  such  abuses  and  facilitate  exchanges  and  thereby 
to  encourage  all  sorts  of  industry  and  commerce,  it  has  been  found 
necessary,  in  all  countries  that  have  made  any  considerable  advances 
tOAvard  improvement,  to  affix  a  public  stamp  upon  certain  quantities 
of  such  particular  metals  as  Avere  in  those  countries  commonly  made 
use  of  to  purchase  goods.  Hence  the  origin  of  coined  money,  and 
of  those  public  offices  called  Mints.  .  .  . 

"  It  is  in  this  manner  that  money  has  become,  in  all  civilized 
nations,  the  universal  instrument  of  commerce,  by  the  interven- 
tion of  which  goods  of  all  kinds  were  bought  and  sold,  or  exchanged 
for  one  another.  What  are  the  rules  which  men  naturally  observe 
in  exchanging  them,  either  for  money  or  for  one  another,  I  shall 
now  proceed  to  examine.  These  rules  determine  what  may  be 
called  the  relative  or  exchangeable  value  of  goods."  ^ 

From  what  has  preceded,  it  will  be  seen  that  Smith  fell  into 
precisely  the  error  of  those  who  hold  governments  to  have 
arisen,  from  a  sense  of  their  necessity,  out  of  compacts  formally 
proposed  by  the  people,  and  entered  into  between  the  govern- 
ments and  the  governed.     Such  writers  imagine  the  people  to 

1  Wealth  of  Nations,  Book  i.  Chap.  ir. 


ADA3I  SMITH.  103 

say :  "  We  cannot  get  on  any  longer  in  tliis  way.  We  must 
have  a  government  to  maintain  order,  protect  property,  and  ad- 
minister upon  a  great  number  of  matters  that  concern  the  public 
welfare."  So,  says  Smith,  the  butcher  has  more  meat  in  his 
shop  than  he  himself  can  consume,  and  of  which  the  brewer 
and  baker  would  each  of  them  be  willing  to  purchase  a  part, 
but  they  have  nothing  to  offer  in  exchange  except  the  different 
productions  of  their  respective  trades.  The  butcher,  however, 
being  already  p^o^-ided  with  all  the  bread  and  beer  he  has  im- 
mediate occasion  for,  no  exchange  of  commodities  can  take 
place  between  them.  They,  therefore,  —  the  butcher,  baker, 
and  brewer  of  primitive  times,  —  being  at  a  dead-lock,  put 
their  heads  together,  and  invented  money,  which  each,  and 
society  as  well,  agreed  to  receive  in  exchange  for  whatever 
each  had  to  sell. 

In  his  illustrations,  Smith,  like  the  advocates  of  the  "  orisfinal 
compact,"  has  inverted  the  whole  order  of  Xature,  —  or  of 
human  development.  ^Mankind  never  speculated  upon  govern- 
ments, upon  their  necessity,  or  upon  the  modes  of  their  organ- 
ization and  administration,  until  ages  after  governments,  and 
powerful  ones  too,  had  existed.  Smith  committed  the  com- 
mon error  in  assuming  the  conditions  and  operations  which 
he  saw  about  him  to  reflect  those  which  took  place  while 
the  race  was  in  its  infanc}'.  If  money,  from  any  cause, 
had  suddenly  disappeared  from  his  own  country,  he  would, 
with  others,  have  undertaken,  from  a  sense  of  its  necessity,  to 
provide  a  new  supply.  What  he  and  his  associates  would 
have  done  he  supposed  were  the  means  by  which  money 
was  first  brought  into  use.  But  the  early  state  or  condition 
which  he  describes  as  leading  to  the  use  of  money  is  purely 
mythical.  Commerce,  in  the  outset,  resulted  from  no  plan  or 
method.  It  never  occurred  to  any  one  to  save  or  accimiulate 
till  he  saw  some  object  that  took  his  fancy,  and  was  told  he 
could  have  it  in  exchange  for  some  article  which  he  could  pro- 
duce or  acquire  by  his  own  labor.  The  motive  had  always  to 
be  first  supplied.  The  most  powerful  incentive  of  all  was  the 
desire  to  possess  the  precious  metals,  which  were  undoubtedly 
among  the  first  acquisitions  of  all  races  capable  of  civiliza- 
tion. Those  articles  wliich  appeal  most  strongly  to  the  sense 
of  beauty  in  man,  not  those  that  discharge  the  primary  wants 
of  his  nature,  alone  supply  adequate  motives  to  continued  ex- 


104  HISTORY   OF  MONETARY  ^^HEORIES. 

ertion  —  to  those  industries  upon  which  civilization  rests.  Had 
man  felt  no  other  want  than  for  food,  he  could  have  had  no 
other  existence  than  an  animal  one.  Had  the  precious  metals 
been  found  in  any  greater  abundance  at  any  time  than  they 
have  been,  their  possession  would  not  have  required  that  per- 
sistent labor  so  necessary  to  his  highest  moral  as  well  as  material 
welfare.  As  they  were  indestructible,  as  well  as  in  universal 
demand,  their  possessor,  as  far  as  they  would  go,  became  at 
once  the  master  of  the  property  and  services  of  others  who 
possessed  them  in  a  less  degree.  With  their  discovery,  the 
power  of  acquisition,  on  any  thing  like  a  scale  sufficient  to  con- 
stitute wealth  or  civilization,  was  for  the  first  time  secured  to 
the  race.  Without  them,  a  person  in  possession  of  herds,  or  of 
the  productions  of  Nature,  unlimited  in  number  or  quantity, 
might  not  be  able  to  supply  himself  with  a  single  article  of 
which  he  might  stand  in  need  other  than  that  which  he  pos- 
sessed. As  the  precious  metals  in  primitive  times  stood  in 
precisely  the  same  relations  to  the  nature  and  wants  of  man 
that  they  do  to-day,  they  served  on  their  first  discovery  pre- 
cisely as  they  do  to-day,  as  money  in  trade.  Discussion  and 
agreement  had  nothing  more  to  do  with  their  adoption  as 
money  than  they  had  with  the  adoption  of  eating  as  a  means  of 
sustaining  life,  or  of  clothing  to  protect  from  the  cold.  Noth- 
ing like  an  "instrument  of  commerce"  was  ever  thought  or 
conceived  of.  With  the  precious  metals,  all  the  conditions 
necessary  for  division  of  labor  were  supplied  long  before  the 
necessity  or  importance  of  such  division  was  felt,  much  less 
thought  of.  No  mission  or  duty  was  ever  assigned  to  the 
race  till  all  the  conditions  for  its  fulfilment  had  been  amply 
and  generously  supplied.  To  assume  otherwise  would  be  to 
impugn  both  Divine  power  and  goodness.  Man,  in  every 
stage  of  his  progress,  could  always  command  the  precious 
metals  in  abundance,  provided  he  was  possessed  of  a  plenty  of 
other  articles  in  demand  for  consumption.  The  primitive 
butcher  and  baker  were  never  in  want  of  a  circulating  medium 
so  long  as  there  was  a  demand  for  their  meat  or  bread.  The 
existence  of  butchers  and  bakers  implies  division  of  labor  and 
a  highly  advanced  social  condition,  which  would  have  been 
impossible  but  for  the  previous  use  of  the  precious  metals 
as  the  universal  solvents  of  transactions.  They  complained  of 
the  want  of  money,  of  a  "circulating  medium,"  only  when 
the  market  was  overstocked  with  their  own  particular  goods. 


ADAM   SMITH.  105 

Oxen,  according  to  Smitli,  were  money  among  the  Greeks  ; 
tobacco  among  the  Virginia  colonists  ;  dried  cod  in  Newfound- 
land ;  and  sugar  in  the  West  Indies.  Such  assertions  are 
absurdities  on  their  face.  The  use  of  all  such  articles  in  ex- 
change, the  one  for  the  other,  is  simple  barter,  and  can  never 
be  any  thing  else.  An  ox  that  is  exchanged  for  a  certain 
quantity  of  sheep  is  no  more  rendered  money  by  such  act  of 
exchange  than  it  is  converted  into  the  sheep.  To  call  sheep 
or  oxen,  or  tobacco  mone}-,  is  to  say  that  oxen  are  sheep,  or 
tobacco  is  gold  and  silver.  They  never  were  used  as  money, 
and  they  never  can  be  used  as  money.  Money  is  the  universal 
equivalent,  always  accepted  at  its  cost,  for  whatever  a  person 
has  to  sell.  There  can  be  no  other  definition  of  it.  All  other 
articles  may  or  may  not  be  accepted  as  such  equivalents.  A 
person  who  has  an  ox  for  sale  will  take  nothing  but  money, 
unless  he  wishes  to  deal  in  simple  barter,  which  is  the  excep- 
tion, not  the  rule.  He  would  gain  nothing  by  exchanging  it 
for  a  horse,  or  for  sheep.  He  could  barter  his  ox  now  with 
much  less  difficulty  than  in  ancient  times.  He  might  not  find 
it  very  difficult  to  dispose  of  its  various  parts,  in  such  cities  as 
New  York  and  London,  for  such  articles  as  he  might  wish  to  ac- 
quire. But  had  all  parties  possessed  of  merchandise  no  other 
modes  of  effecting  their  exchanges  but  those  in  kind,  society 
would  be  speedily  remitted  to  its  original  condition  of  barbar- 
ism. It  may  often  happen  that  oxen,  tobacco,  codfish,  and 
sugar  may  be  largely  received  in  exchange  for  what  a  person 
has  to  sell,  to  be  held  by  him  till  they  can  be  converted  into 
money,  just  as  they  were  produced  to  be  converted  into  money. 
It  makes  no  difference  to  their  possessor  whether  they  are  ac- 
quired at  first  or  second  hand.  The  object  is  the  same  in 
either  case.  Their  acceptance  in  barter  does  not  make  them 
monej^.  A  country  shopkeeiDcr  may  barter  a  portion  of  his 
stock  for  produce,  which  he  transports  to  market,  and  there 
converts  into  money.  But  this  process  does  not  make  either 
the  goods  money,  or  the  produce  money.  He  may  "  make 
money,"  as  the  phrase  is,  or  he  may  be  ruined  by  the  fall  of 
that  for  which  he  exchanges  his  goods.  He  can  never  tell  the 
extent  of  his  losses  or  profits  till  he  has  converted  that  which 
he  has  received  into  money. 

The  radical  error,  however,  of  Smith,  with  all  his  school,  was 


106  HISTORY  OF  MONETARY   THEORIES. 

the  distinction  wMcli  lie  made  between  money  (gold  and 
silver)  and  capital.  "In  all  countries,"  he  tells  us,  "men 
seem,  at  last,  to  have  been  determined,  by  irresistible  reasons, 
to  give  preference  for  this  employment  to  metals  above  every 
other  commodity.  Metals  cannot  only  be  kept  with  as  little 
loss  as  any  other  commodity,  but  they  can  likewise,  without 
loss,  be  divided  into  any  number  of  parts  ;  as,  by  fusion,  these 
parts  can  easily  be  reunited  again,  —  a  quality  tvhich,  more  than 
any  other  quality^  renders  them  fit  to  he  the  instruments  of  com- 
merce and  circulation.'''  The  intrinsic  value  of  money  (gold 
and  silver),  depending  upon  a  preference  which  universally 
prevails  for  them,  together  with  the  regularity  of  their  supply, 
—  qualities  by  virtue  of  which  they  serve  as  money,  —  Smith 
wholly  overlooked.  With  him  then-  divisibility  and  capacity  to 
be  reunited,  not  their  value,  chiefly  fitted  them  to  serve  as 
such.  In  this  distinction  between  money  and  capital.  Smith 
implicitly  followed  Aristotle  and  Hume  ;  and  he  has  been  im- 
plicitly followed  by  all  subsequent  writers  in  the  assumption, 
that  even  the  most  worthless  articles  may  serve  as  money,  and 
be  maintained  at  the  par  value  of  coin,  provided  they  do  not 
exceed  in  amount  that  necessary  to  effect  the  exchanges  of 
the  community  using  them. 

From  the  distinction  made  between  money  and  capital,  it 
was  natural  that  Smith  should  consider  coinage  as  an  essential 
quality  of  money.  "  It  has  been  found  necessary,"  he  says, 
"  in  all  countries  that  have  made  any  considerable  advance 
toward  improvement,  to  affix  a  public  stamp  upon  certain 
quantities  of  such  particular  metals  as  were  in  those  countries 
commonly  made  use  of  to  purchase  goods."  He  was  either 
ignorant  of  or  overlooked  the  fact,  that  coinage  was  wholly 
unknown  to  the  great  nations  of  antiquity,  —  the  Eg}-ptians, 
Chaldeans,  and  Phoenicians.  All  history  bears  witness  to  the 
vastness  of  their  commerce  and  wealth.  Coinage  is  a  very 
valuable  contrivance ;  but,  in  all  great  transactions  at  the 
present  day,  coins  pass  by  weight,  not  by  tale.  In  this  way 
they  pass  at  their  actual,  not  at  their  denominational,  value. 
The  ancients  were  unquestionably  experts  in  the  refining  of 
metals,  and  had  all  the  means  necessary  for  ascertaining  their 
value  by  their  weight. 


ABAJ,!  szsnxH.  107 


As  Smith  made  a  wide  distinction  between  money  and  capital, 
yet,  as  money  was  the  standard  by  which  all  other  articles 
were  measm-ed,  he  was  necessarily  driven  to  another  distinc- 
tion, equally  absurd,  —  that  of  the  real  and  nominal  prices  of 
commodities.  Labor  was  the  measure  of  their  real  value  or 
price ;  money,  of  their  nominal  value.  To  use  his  own 
words :  — 

"  But  though  labor  be  the  real  measure  of  the  exchangeable  value 
of  all  commodities,  it  is  not  that  by  which  their  value  is  commonly 
estimated.  It  is  often  difficult  to  ascertain  the  propoition  between 
two  different  quantities  of  labor.  The  time  spent  in  two  different 
sorts  of  work  will  not  always  alone  determine  this  proportion. 
The  different  degrees  of  hardship  endured,  and  of  ingenuity  exer- 
cised, must  likewise  be  taken  into  account.  There  may  be  more 
labor  in  an  hour's  hard  work  than  in  two  hours'  easy  business  ;  or 
in  an  hour's  application  to  a  trade  which  it  cost  ten  years'  labor 
to  learn,  than  in  a  month's  industry  at  an  ordinary'  and  obvious 
employment.  But  it  is  not  easy  to  find  any  accurate  measure, 
either  of  hardness  or  ingenuity.  In  exchanging,  indeed,  the  differ- 
ent productions  of  different  sorts  of  labor  for  one  another,  some 
allowance  is  commonly  made  for  both.  It  is  adjusted,  however, 
not  by  any  accurate  measure,  but  by  the  higgling  and  baigaiuiug  of 
the  market ;  according  to  that  sort  of  rough  equity,  which,  though  not 
exact,  is  sufficient  for  carrying  on  the  business  of  daily  life.  Every 
commodity,  besides,  is  more  frequently  exchanged  for,  and  thereby 
compared  with,  other  commodities  than  with  labor.  It  is  more 
natural,  therefore,  to  estimate  its  exchangeable  value  by  the  quan- 
tity of  some  other  commodity  than  by  that  of  the  labor  which 
it  can  purchase.  The  greater  part  of  people,  too,  understand 
better  what  is  meant  by  a  quantity  of  a  particular  commodity  than 
by  a  quantity  of  labor.  The  one  is  a  plain,  palpable  object ;  the 
other  is  an  abstract  notion,  which,  though  it  can  be  made  sufficiently 
palpable,  is  not  altogether  so  natural  and  obvious."  ^ 

The  preceding  paragraph  refutes  his  own  cardinal  proposi- 
tion, that  labor  is  the  proper  measure  of  values.  While 
assuming  that  labor  is  the  measure  of  value,  it  is  impossible. 
Smith  tells  us,  that  it  shoidd  be  a  measure  of  value,  for  the 
reason  that  one  hour's  labor  of  one  man  may  have  a  value 
equal  to  ten  hours'  labor  of  anotlier  man  similarly  employed  ; 
and  that,  consequently,  the  true  measui-e  of  value  cannot  be 
the  conventional  one,  —  that  the  true  measure  of  value  is  an 

1  Wealth  of  Nations,  Book  i.,  Chap.  v. 


108  HISTOEY   OF   MONETARY   THEOEIES. 

abstract  notion,  —  that  the  conventional  measure  is  a  plain-, 
palpable  object.  How  can  there  be  abstract  measures  of  any 
thing  ?  What  is  an  abstract  foot,  5-ard,  pound  weight,  dollar, 
or  an  abstract  quantity  of  labor?  All  these  are  concrete, 
real  things.  Abstractions  are  not  the  subjects  which  men 
buy  and  sell.  Why  not  accept  the  fact  as  proving  what 
it  does  prove  ?  That  Smith  in  a  single  paragraph  could  assert 
a  law,  and  at  the  same  time  show  no  such  law  to  be  possible, 
is  evidence  of  such  a  want  of  the  reasoning  faculty  as  to 
throw  a  well-grounded  distrust  over  all  his  conclusions,  no 
matter  the  questions  of  which  he  may  treat. 

"  When  barter  ceases,  and  money  becomes  the  common  instrument 
of  commerce,  every  particular  commodity  is  more  frequently  ex- 
changed for  money  than  for  any  other  commodity.  The  butcher 
seldom  carries  his  beef  or  mutton  to  the  baker  or  brewer,  in  order 
to  exchange  them  for  bread  or  for  beer  ;  but  he  carries  them  to  the 
market,  where  he  exchanges  them  for  money,  and  afterwards  ex- 
changes that  money  for  bread  or  for  beer.  The  quantity  of  money 
he  can  get  for  them  regulates,  too,  the  quantity  of  bread  or  beer 
which  he  can  afterwards  purchase.  It  is  more  natural  and  obvious 
to  him,  thei'efore,  to  estimate  their  value  by  the  quantity  of  money, 
—  the  commoditv  for  which  he  exchanijes  them,  —  than  bv  that  of 
bread  and  beer,  —  the  commodities  for  which  he  can  exchange  them 
only  by  the  intervention  of  another  commodity  ;  and  rather  to  say 
that  his  butcher's  meat  is  worth  threepence  or  fourpence  a  pound, 
than  that  it  is  worth  tliree  or  four  pounds  of  bread  or  three  or  four 
quarts  of  small  beer.  Hence  it  comes  to  pass,  that  the  exchange- 
able value  of  every  commodity  is  more  frequently  estimated  by 
the  quantity  of  money  than  by  the  quantity  either  of  labor  or  of 
any  other  commodity  which  may  be  had  in  exchange  for  it."  ^ 

"  When  barter  ceases,"  says  Smith,  "  money  becomes  the 
common  instrument  of  commerce."  Barter  never  ceases. 
There  is  an  incomparably  greater  amount  of  barter  in  a  civil- 
ized than  in  an  uncivilized  age,  —  when  there  are  butchers  and 
bakers  than  before.  The  exchange  of  money  for  bread  or 
beer  is  just  as  much  an  act  of  barter  as  an  exchange  of  bread 
for  beer.  As  equal  values  are  exchanged  when  money  is  used, 
that  for  which  it  is  exchanged  is  just  as  much  the  instrument 
of  commerce  as  the  money.  With  Smith,  however,  money 
was  not  the  subject,  only  the  instrument,  of  commerce,  like 
the  yardstick  or  the  railroad  car,  the  value  of  which  bears  no 

1  "Wealth  of  Natiuns,  Book  i.,  Chap.  v. 


ADAM  SinXH.  109 

relation  to  the  value  of  the  articles  to  he  measured  or  trans- 
ferred. To  be  the  subject  of  commerce,  it  must,  like  all 
other  subjects,  have  a  real  equal  to  its  nominal  value.  Figures 
are  the  instruments,  not  the  subjects,  of  commerce.  So,  with 
Smith,  money  was  the  instrument,  not  the  subject,  of  com- 
merce. It  had  value  ;  but  it  was  not  chiefly  by  means  of  that 
value  that  it  served  as  a  medium  of  exchange. 

From  the  discussion  of  the  distinction  between  real  and 
nominal  prices,  Smith  proceeds  to  show  its  importance  in 
practice. 

"Gold  and  silver,  like  every  other  commodity,  vary  in  value; 
are  sometimes  cheaper  and  sometimes  dearer,  sometimes  of  easier 
and  sometimes  of  more  difficult  purchase.  .  .  .  But  as  a  measure 
of  quantity,  such  as  the  natural  foot,  fathom,  or  handful,  which  is 
continually  varying  in  its  own  quantity,  can  never  be  an  accurate 
measure  of  the  quantity  of  other  things  ;  so  a  commodity  which  is 
itself  constantly  varying  in  its  own  value  can  never  be  an  accu- 
rate measure  of  the  value  of  other  commodities.  Equal  quantities 
of  labor,  at  all  times,  may  be  said  to  be  of  equal  value  to  the 
laborer."  .  .  . 

"  When  a  landed  estate,  therefore,  is  sold  with  a  reservation  of 
perpetual  rent,  if  it  is  intended  that  this  rent  should  always  be  of 
the  same  value,  it  is  of  importance  to  the  family  in  whose  favor  it 
is  reserved  that  it  should  not  consist  in  a  particular  sum  of  money. 
.  .  .  Rents  which  have  been  reserved  in  com  have  preserved  their 
value  much  better  than  those  which  have  been  reserved  in  money, 
even  where  the  denomination  of  the  coin  has  not  been  altered. 
By  the  18th  of  Elizabeth  it  was  enacted,  that  a  third  of  the  rents 
of  all   the  college  leases  should  be   reserved  in   corn,  to  be  paid 
either   in   kind  or  according  to  the  prices  at  the  nearest  public 
market ;  the  money  arising  fi-om  this  corn  rent,  though  originally 
but  one-third  of  the  whole,  is   in   the  present  time,  according  to 
Blackstone,  commonly  near  double  what  arises  from  the  other  two- 
thirds.     The  old  money-rents  of  colleges  must,  according  to  this 
account,  have  sunk  to  almost  a  fourth  part  of  their  ancient  value, 
or  are  worth  a  little  more  than  a  fourth  part  of  the  coin  which  they 
were  formerly  worth.     But,  since  the  reign  of  Philip  and  Mary,  the 
denomination  of  the  English  coin  has  undergone  little  or  no  alter- 
ation.    This  depreciation,  therefore,  in  the  value  of  money  rents  of 
colleges  has  arisen  altogether  from  the  depreciation  in  the  vahie  of 
silver  (money).     A  rent,  therefore,  reserved  in  corn  is  liable  only 
to  the  variations  in  the  quantity  of  labor  which  a  certain  quantity 
of  corn  can  purchase  ;  but  a  rent  reserved  in  any  other  commodity 
is  liable  not  only  to  the  vaiiations  in  the  quantity  of  labor  which 
any  particular  quantity  of  corn  can  purchase,  but  to  the  variations 
in  the  quantity  of  corn  which  can  be  purchased  by  any  particular 
quantity  of  that  commodity. 


110  HISTORY   OF  MOKETAEY  THEORIES. 

"  Though  the  real  value  of  a  corn  rent,  it  is  to  be  observed,  how- 
ever, varies  much  less  fi-om  century  to  century  than  that  of  a  money 
rent,  it  varies  much  more  from  year  to  year.  But  the  value  of 
silver,  though  it  sometimes  varies  greatly  from  century  to  century, 
seldom  varies  much  from  year  to  year  ;  but  frequently  continues  the 
same,  or  very  nearly  the  same,  for  a  half  century  or  a  century  :  the 
ordinary  or  average  money  price  of  corn,  therefore,  may,  during  so 
long  a  period,  continue  the  same  or  very  nearly  the  same,  too,  and 
along  with  it  the  money  price  of  labor;  provided,  at  least,  the 
society  continues  in  other  respects  in  the  same  or  nearly  in  the  same 
condition.  In  the  mean  time,  the  temporary  and  occasional  price 
of  corn  may  frequently  be  double  one  year  of  what  it  had  been  the 
year  before,  or  fluctuate,  for  example,  from  twenty-five  to  fifty 
shillings  the  quarter.  But,  when  corn  is  at  the  latter  price,  not  only 
the  real  but  the  nominal  value  of  the  corn  rent  Avill  be  double  of 
what  it  is  at  the  former,  or  will  command  double  the  quantity 
either  of  labor  or  of  the  greater  part  of  other  commodities  ;  the 
money  price  of  labor,  and  along  with  it  that  of  most  other  things, 
continuing  the  same  during  all  these  fluctuations. 

"  Labor,  therefore,  it  appears,  evidently  is  the  only  universal  as 
well  as  tlie  only  accurate  measure  of  value,  or  the  only  standard 
by  which  we  can  compare  the  value  of  different  commodities  at  all 
times  and  places.  We  cannot  estimate,  it  is  allowed,  the  real  value 
of  commodities  from  century  to  century  by  the  quantities  of  silver 
which  can  be  given  for  them.  "We  cannot  estimate  it  from  year  to 
year  by  the  quantities  of  corn.  By  quantities  of  labor  we  can, 
with  the  greatest  accuracy,  estimate  it  both  from  century  to  century 
and  from  year  to  year.  From  century  to  century  corn  is  a  better 
measure  than  silver,  because  from  eentury  to  century  equal  quan- 
tities of  corn  will  command  the  same  quantity  of  labor  more 
nearly  than  equal  quantities  of  silver.  From  year  to  year,  on  the 
contrary,  silver  is  a  better  measure  than  corn,  because  equal  quan- 
tities of  it  will  more  nearly  command  the  same  quantity  of 
labor.  .  .  . 

"  As  it  is  the  nominal  or  money  price  of  goods,  therefore,  which 
finally  determines  the  prudence  or  imprudence  of  all  purchases  or 
sales,  and  thereby  regulates  almost  the  whole  business  of  common 
life  in  which  price  is  concerned,  we  cannot  wonder  it  should  have 
been  so  much  more  attended  to  than  the  real  price."  ^ 

Smith  has  already  demonstrated  it  to  be  impossible  that 
labor  should  be  the  measure  of  value ;  yet  he  continually 
repeats  that  it  is  the  only  true  measure.  As  that  cannot  be 
used,  corn,  he  says,  is  a  much  better  measure  of  value  than 
coin.  This  assertion,  like  the  previous  one,  is  contradicted  by 
the  whole  experience  of  society.  If  corn  were  a  more  accu- 
rate measure  of  value  than  coin,  it  would  have  been  adopted 

1  Wealth  of  Nations,  Book  i.,  Chap.  t. 


AD  Ail  s:NnTH.  Ill 

as  such.  That  it  never  has  been  adopted  is  proof  that  coin  is 
the  better  measure.  His  assertion  that  the  price  of  coin  has 
fluctuated  through  long  periods  more  than  that  of  corn  is  not 
supported  by  a  particle  of  evidence.  No  one  has  ever  hesi- 
tated to  enter  into  contracts  paj^able  in  coin,  no  matter  the 
time  that  was  to  elapse  before  they  were  to  mature.  No  one 
would  ever  enter  into  contracts,  the  consideration  or  value  of 
which  was  to  be  measured  by  corn,  from  an  entire  uncertainty 
as  to  its  future  value.  This  is  decisive  of  the  whole  question. 
Coin  is  the  better  measure  of  values,  because  its  value  is  more 
uniform.  The  illustration  he  uses,  the  leases  of  the  college 
lands,  proves  the  exact  opposite  of  that  which  he  assumed  it 
to  prove.  With  him,  corn  should  be  made  a  measure  of  value, 
from  the  greater  uniformity  of  its  value  than  that  of  coin. 
The  leases  should  be  made  payable  in  corn,  for  the  reason  that 
it  was  certain  to  appreciate  much  more  rapidly  in  value  than 
coin^  securing  a  corresponding  advantage  to  the  landlord. 
Here  is  another  palpable  contradiction  almost  in  the  same  par- 
agraph. In  order  to  prove  the  dej^reciation  in  the  value  of 
silver.  Smith  should  have  shown  it  to  have  fallen  in  value  in 
reference  to  other  kinds  of  merchandise  or  property  as  well  as 
food.  It  might  require  twice  the  weight  of  silver  to  purchase 
in  his  day  a  given  quantity  of  corn  that  it  did  two  centuries 
previous  ;  but  one-half  or  one-quarter  of  the  weight  of  silver 
might  purchase  twice  the  quantity  of  iron,  or  of  other  articles 
entering  into  domestic  economy,  that  it  would  in  the  sixteenth 
century.  What  does  this  prove  ?  Not  that  the  value  of  silver 
had  changed ;  but  that  other  articles  had  fallen  in  price,  from 
their  reduced  cost  of  production.  The  increase  of  population 
in  England  may  have  increased  the  value  of  food,  while  such 
increase,  from  the  better  combination  and  direction  of  indus- 
tries, may  have  greatly  reduced  the  price  of  other  articles. 
It  is,  therefore,  just  as  proper  to  infer  that  the  price  of  silver 
has  appreciated  from  the  fall  in  value  of  other  articles  than 
food,  as  that  it  has  depreciated  from  the  increase  in  the  price 
of  food.  As  the  price  of  the  greater  part  of  articles  enter- 
ing into  consumption  is  far  lower  than  it  was  three  hundi-ed 
years  ago,  the  evidence,  if  such  reduction  be  evidence,  is 
altogether  on  the  side  of  an  appreciation  of  the  value  of  gold 
and  silver.  The  rise  or  fall  of  commodities,  however,  proves 
nothing  on  either  side.     The  value  of  coin  depends  upon  its 


112  HISTOIIT  OF   MONETARY  THEORIES. 

cost ;  that  of  all  other  articles,  upon  demand  and  cost.  To 
prove  the  appreciation  or  depreciation  of  money,  its  price  or 
value,  which  measures  its  cost,  should  be  compared  with  the 
price  of  other  articles  whose  cost  has  remained  unchanged  for 
long  periods  of  years,  or  whose  cost  has  changed  no  more 
than  the  cost  of  producing  gold  and  silver ;  but  all  such  com- 
parisons amount  to  nothing,  fi-om  the  want  of  adequate  data 
upon  which  they  can  be  based.  Whatever  may  be  the  fact, 
however,  a  little  reflection  should  have  shown  Smith  that  no 
advantage  could  be  gained  from  the  apphcation  of  his  distinc- 
tion between  nominal  and  real  price.  If  it  were  for  the  inter- 
est of  lessors  of  lands  to  have  their  rents  payable  in  corn,  it 
would  be  equally  against  the  interest  of  the  lessees  ;  and  as  it 
takes  two  to  make  a  bargain,  no  lease  would  ever  be  made 
upon  the  terms  suggested.  Nothing  can  be  more  puerile  than 
such  illustrations  and  arguments.  Of  course,  there  is  little 
use  in  replpng  to  them,  and  they  are  referred  to  chiefly  for 
the  purpose  of  showing  the  total  inadequacy  of  Smith's  prem- 
ises, and  the  absurdity  of  his  conclusions  from  them.^ 

From  the  discussion  of  the  distinction  between  real  and 
nominal  prices,  Smith  proceeds,  in  the  second  chapter  of  the 
second  book  of  his  "  Wealth  of  Nations,"  to  that  of  metallic 
and  paper  money  ;  or,  to  use  his  own  words,  "  money  considered 
as  a  particular  branch  of  the  general  stock  of  society,  or  the 
expense  of  maintaining  the  national  capital." 

"  It  has  been  shown  in  the  first  book  "  (that  on  division  of  h\bor), 
says  Smith,  "  that  the  price  of  the  greater  part  of  commodities  re- 
solves itself  into  three  parts  :  one  of  which  pays  the  wages  of  the 
laborer  ;  another,  the  profits  of  the  stock  ;  and  a  third,  the  rent  of 
the  land  which  had  been  employed  in  producing  and  bringing  them 
to  market.  .  .  .  The  price  of  every  commodity  necessarily  resolves 
itself  into  some  one  or  other  or  all  of  these  three  parts.  Every 
part  of  it  which  goes  neither  to  rent  or  to  wages  being  necessarily 
profit  to  somebody. 

1  Smith's  assumption,  which  is  awkwardly  interpolated  into  his  chapters  on 
money,  that  corn  is  a  better  measure  of  value  than  coin,  is  wholly  borrowed,  and 
without  acknowledgment,  from  Law,  with  this  difference,  that,  while  Law  states 
the  argument  most  fully  in  a  single  paragraph,  Smith  drags  the  reader  through 
page  after  page  of  incoherent  and  inconclusive  assertions,  utterly  foreign  to  his 
main  argument,  and  winds  up  by  proving  the  very  opposite  of  the  proposition 
with  which  he  started. 


ADAM   SINHTH.  113 

"  Since  this  is  the  case,  it  has  been  observed,  with  regard  to  every 
particuhir  commodity  taken  separately,  it  must  be  so^'with  regard 
to  all  the  commodities  which  compose  the  whole  annual  produce  of 
the  land  and  labor  of  every  country,  taken  complexly.  The  whole 
price  or  exchangeable  value  of  that  annual  produce  must  resolve 
itself  into  the  same  three  parts,  and  be  parcelled  out  among  the 
different  inhabitants  of  the  country,  either  as  the  wages  of  "their 
labor,  the  profits  of  their  stock,  or  the  rent  of  their  land. 

"  But  though  the  whole  value  of  the  annual  produce  of  the  land 
and  labor  of  every  country  is  thus  divided  among,  and  constitutes 
a  revenue  to,  its  different  inhabitants,  .  .  .  yet  as" in  the  rent  of  a 
private  estate  we  distinguish  between  the  gross  and  tlie  neat  rent, 
so  we  may  likewise  in  the  revenue  of  all  the  inhabitants  of  a  great 
country.  The  gross  rent  of  a  private  estate  comprehends  what- 
ever is  paid  by  the  farmer  ;  the  neat  rent,  what  remains  free  to  the 
landlord  after  deducting  the  expenses  of  management,  of  repairs, 
and  all  other  necessary  charges,  or  what,  without  hurting  his  estate, 
he  can  afford  to  place  in  his  stock  reserved  for  immediate  consump- 
tion, or  to  spend  upon  his  table,  equipage,  the  ornaments  of  his 
house,  his  private  enjoyments  and  amusements.  His  real  wealth  is 
in  proportion,  not  to  his  gross,  but  to  his  neat,  rent. 

"  The  gross  revenue  of  all  the  inhabitants  of  a  great  country 
comprehends  the  Avhole  annual  produce  of  their  laml  and  labor  ; 
the  neat  revenue,  what  remains  free  to  them  after  deducting  the 
expense  of  maintaining,  first,  their  fixed,  and,  secondly,  their  cir- 
culating, capital ;  or  what,  without  encroaching  upon  their  capital, 
they  can  place  in  their  stock  reserved  for  immediate  consumption, 
or  spejid  upon  their  subsistence,  conveniences,  and  amusement. 
Their  real  wealth,  too,  is  in  projiortion,  not  to  their  gross,  but  to 
their  neat,  revenue. 

"  The  whole  expense  of  maintaining  the  fixed  capital  must  evi- 
dently be  excluded  from  the  neat  revenue  of  society.  Neither  the 
materials  necessary  for  supporting  their  useful  machines  and  instru- 
ments of  trade,  their  profitable  buildings,  &c.,  nor  the  produce  of 
the  labor  necessary  for  fashioning  these  materials  into  proper  form, 
can  ever  make  any  part  of  it. 

"  The  expense  of  maintaining  the  fixed  capital  of  a  great 
country  may  very  properly  be  compared  to  that  of  repairs  in  a 
private  estate  :  the  expense  of  repairs  may  be  frequently  necessary 
for  supporting  the  produce  of  the  estate,  and,  consequently,  both 
the  gross  and  the  neat  rent  of  the  landlord.  When,  by  a  more 
proper  direction,  however,  it  can  be  diminished  without  occasion- 
ing any  diminution  of  j^roduce,  the  gross  rent  remains  at  least  the 
same  as  before,  and  the  neat  rent  is  necessarily  augmented. 

"  But,  though  the  whole  expense  of  maintaining  the  fixed  capital 
is  thus  necessarily  excluded  from  the  neat  revenue  of  society,  it  is 
not  the  same  case  with  that  of  maintaining  the  circulating  capital. 
Of  the  four  parts  of  which  this  latter  capital  is  composed,  —  money, 
provisions,  materials,  and  finished  work,  —  the  three  last,  it  has 
already  been  observed,  are  regularly  withdrawn  from  it,  ami  placed 
either  in  the  fixed  capital  of  the  society,  or  in  their  stock  reserved 

8 


114  HISTOEY  OF  MOXETAHY  THEORIES. 

for  immediate  consumption.  "Whatever  portion  of  these  consum- 
able goods  is  not  employed  in  maintaining  the  former,  goes  all  to 
the  latter,  and  makes  a  part  of  the  neat  revenue  of  the  society. 
The  maintenance  of  these  three  parts  of  the  circulating  capital, 
therefore,  withdraws  no  portion  of  the  annual  produce  from  the 
neat  revenue  of  the  society,  besides  what  is  necessary  for  maintain- 
ing the  fixed  capital. 

"The  circulating  capital  of  a  society  is  in  this  respect  different 
from  that  of  an  individual.  That  of  an  individual  is  wholly  excluded 
fi-om  making  any  part  of  his  neat  revenue,  which  must  consist 
altogether  in  his  profits.  But,  though  the  circulating  capital  of 
every  individual  makes  a  part  of  that  of  the  society  to  which  he 
belongs,  it  is  not  upon  that  account  totally  excluded  from  making 
a  part  likewise  of  their  neat  revenue.  Though  the  whole  goods  in 
a  merchant's  shop  must  by  no  means  be  placed  in  his  own  stock  re- 
served for  immediate  consumption,  they  may  in  that  of  other 
people's,  from  whom  a  revenue  derived  from  other  funds  may 
regularly  replace  their  value  to  him,  together  with  its  profits,  with- 
out occasioning  any  diminution  either  of  his  capital  or  of  theirs. 

"  Money,  therefore,  is  the  only  part  of  the  circulating  capital  of  a 
society  of  which  the  maintenance  can  occasion  any  diminution  in 
their  neat  revenue. 

"  The  fixed  capital,  and  that  part  of  the  circulating  capital  which 
consists  in  money,  so  far  as  they  affect  the  revenue  of  society, 
bear  a  very  great  resemblance  to  one  another. 

"  As  those  machines  and  instruments  of  trade,  ifcc,  require  a  cer- 
tain expense,  first  to  erect  them,  and  afterwards  to  support  thera, 
both  of  which  expenses,  though  they  make  a  part  of  the  gross,  are 
deductions  from  the  neat,  revenue  of  society  :  so  the  stock  of 
money  which  circulates  in  any  country  must  require  a  certain  ex- 
pense, first  to  collect  it,  and  afterwards  to  support  it ;  both  which 
expenses,  though  they  make  a  part  of  the  gross,  are  in  the  same 
manner  deductions  from  the  neat,  revenue  of  the  society.  A  cer- 
tain quantity  of  very  valuable  materials,  gold  and  silver,  and  of 
very  curious  labor,  instead  of  augmenting  the  stock  reserved  for 
immediate  consumption,  —  the  subsistence,  convenience,  and  amuse- 
ment of  individuals, — is  employed  in  supporting  that  great  but 
expensive  instrument  of  commerce  by  means  of  which  every  indi- 
vidual in  the  society  has  his  subsistence,  conveniences,  and  amuse- 
ments regularly  distributed  to  him,  in  their  proper  proportions. 

"  As  the  machines  and  instruments  of  trade,  «fcc.,  which  compose 
the  fixed  capital  either  of  an  individual  or  of  society,  make  no  part 
of  the  gross  or  of  the  neat  revenue  of  either,  so  money,  by  means 
of  which  the  whole  revenue  of  society  is  regularly  distributed 
among  its  different  members,  makes  itself  no  part  of  that  revenue. 
The  great  wheel  of  circulation  is  altogether  different  from  the 
goods  which  are  circulated  by  means  of  it.  The  revenue  of 
society  consists  altogether  in  those  goods,  and  not  in  the  wheel 
which  circulates  them.  In  computing  either  the  gross  or  the 
neat  revenue  of  any  country,  we  must  always,  from  their  whole 
annual  circulation  of  money  and  goods,  deduct  the  whole  value  of 


ADAM   SMITH.  115 

the  money,  of  which  not  a  single  farthing  can  ever  make  any  part 
of  either."  ^ 

The  preceding  extracts  are  given  at  length,  as  the  only 
mode  of  presenting  Smith's  notions  upon  the  subject  of  money. 
Nothing  can  be  more  inappropriate  than  his  method  to  scien- 
tific discussion.  He  has  more  than  Aristotle's  passion  for 
elaborate  classification,  resting  upon  no  better  support  than  his 
own  fancies.  That  ^Yhich  di%ndes  the  circulating  capital  of 
society  into  money,  material,  provisions,  and  finished  work, 
is  wholly  arbitrary  and  absurd.  Money  —  gold  and  silver  — 
is  material  in  the  same  sense  as  is  iron,  wood,  or  wool.  Like 
these,  it  is  constantly  going  into  the  arts,  —  into  tools  and 
finished  work.  It  is  in  one  sense  the  highest  kind  of  finished 
work,  as  it  is  alwaj'S  received  by  every  one  in  exchange  for 
what  he  may  have  to  sell.  The  classification  given  by  Smith, 
therefore,  has  no  warrant  whatever  in  the  nature  of  things. 
The  usual  classification  of  property  —  that  known  to  the  law 
and  to  the  books  —  into  real  and  personal,  is  the  only  proper 
one,  for  the  reason  that  it  is  the  only  one  that  rests  upon  a 
radical  distinction  in  kind. 

It  is  a  capital  defect  in  Smith,  as  well  as  in  all  the  Econo- 
mists, that  he  entirely  overlooks  interest  as  an  element  in 
price,  and  as  a  source  of  revenue.  "  The  revenue  of  society," 
he  tells  us,  "  consists  wholly  of  the  thi-ee  parts  of  the  circu- 
lating capital,  consisting  of  provisions,  material,  and  finished 
work.  The  maintenance  of  these  costs  nothing;  money  — 
though  a  part  of  the  circulating  capital — is  wholly  to  be  de- 
ducted from  the  neat  and  gross  revenue,  of  which  not  a  far- 
thing can  ever  make  any  part  of  either.  The  fixed  capital  and 
that  part  of  the  circulating  capital  which  consists  of  money, 
have,  so  far  as  they  affect  the  neat  revenue  of  society,  a  very 
great  resemblance  the  one  to  the  other." 

The  expense  of  maintaining  any  kind  of  property  is,  in  one 
very  important  particular,  in  direct  ratio  to  its  cost ;  and  this  is 
interest  on  its  cost.  Interest  is  always  chargeable  against  every 
kind  of  property,  for  the  reason  that  it  could  be  realized  on 
loans  of  the  money  paid  for  it.  Interest,  therefore,  enters  into 
the  price  of  every  article  put  upon  the  market.  Take  the 
case  of  a  carpet :  the  importer  of  the  wool  used  in  its  manu- 

1  Wealth  of  Nations,  Book  ii.,  Chap.  iL 


) 


116  pr   HISTORY  OF   MONETARY  THEORIES. 


facture  clia'"ges  interest  on  its  cost  from  the  time  of  its 
purchase,  in  Africa  or  Australia,  till  it  is  delivered  to  the  manu- 
facturer. If  it  be  sold  on  time,  interest  in  addition  to  cost  is 
charged  Jl'^r  such  time.  The  interest  the  manufacturer  pays  is 
includtff  in  the  price  at  which  the  finished  goods  are  put  upon 
the  mafl^et.  If  sold  on  time,  interest  is  charged  on  such  sales. 
If  the  merchant  pay  cash,  he  includes  interest  on  the  price 
to  his  customers,  as  the  only  mode  in  which  he  can  be  reim- 
bursed for  the  use  of  his  capital.  But  for  such  payments,  he 
might  be  receiving  interest  on  loans  of  the  money  by  which 
they  were  made.  The  price  which  the  consumer  pays  is  not 
only  the  cost,  but  interest  on  the  same  from  the  time  of  the 
purchase  of  the  material  till  the  finished  product  is  taken  for 
consumption  ;  interest  on  the  machinery  and  tools  employed  in 
its  manufacture  ;  on  the  cost  of  their  maintenance,  cost  of  ware- 
housing, cost  of  distribution  for  consumption  ;  and  a  profit  to 
all  parties  engaged  in  the  various  processes  described.  It  costs 
far  less  to  maintain  money  than  it  does  any  other  kind  of  capital. 
In  such  a  country  as  the  United  States,  for  example,  there  is  at 
the  close  of  every  harvest  a  year's  stock  of  food  on  hand,  the 
value  of  wliich  may  be  estimated  at  ^1,000,000,000.  This 
food  is  to  be  carried  by  some  one  for  an  average  of  six  months, 
for  which  service  interest  is  charged  to  the  consumers,  amount- 
ing, say,  to  $30,000,000  ;  the  cost  of  warehousing  tliis  food 
may  be  estimated  at  $20,000,000  ;  insurance,  ^10,000,000 : 
making  a  total  of  160,000,000,  every  dollar  of  which  enters 
into  the  price.  It  costs  very  little  to  maintain  11,000,000,000 
for  six  months.  On  the  contrary,  while  that  value  of  produce 
is  to  be  carried  without  interest  to  the  holder,  an  equal  amount 
of  money  would  produce  him  $30,000,000.  Money  can  be 
used  at  all  times  ;  food  must  be  held  in  very  large  quantities, 
in  reserve,  for  future  use.  The  maintenance  of  such  reserves  is 
a  burden  to  which  society  must  submit.  Such  comparisons 
or  illustrations,  however,  are  of  very  little  importance  ;  for  the 
reason  that  every  kind  of  property  necessary  to  the  operations 
of  society  is  to  be  considered  as  equally  expensive  in  its  main- 
tenance, equally  valuable,  and  equally  productive  in  its  use. 
But  for  money,  the  exchanges  of  property  could  not  be  made  ; 
nor  could  it  have  any  commercial  value. 

Money,  therefore,  as  a  medium  of  exchange,  performs  an  in- 
dispensable function,  and  consequently  is  always  a  most  impor- 


ADAM   SMITH.  117 

tant  source  of  revenue.  The  revenue  of  society,  in  fact,  is  in 
ratio  to  the  amount  of  property  it  possesses,  whatever  be  its 
form,  —  whether  fixed  or  floating,  real  or  personal.  It  is  not 
necessary  even  that  capital — money  —  should  be  actively  em- 
ployed, in  order  that  it  may  .  v.  girded  as  productive.  Every 
prudent  person  will  always  seek  to  have  on  hand  an  amount 
of  it  in  excess  of  that  necessary  to  his  immediate  wants,  or 
uses,  to  meet  unforeseen  calls  or  emergencies.  Such  reserves 
will  consist  either  of  gold  or  silver,  or  of  the  notes  and  credits 
of  Banks,  which  entitle  their  holder  to  gold  and  silver,  or  to 
whatever  these  will  purchase.  A  merchant,  whose  profit  is 
in  the  nature  of  a  commission,  is  not  expected  to  maintain 
on  hand  an  amount  of  capital  equal  to  the  liabilities  he  as- 
sumes. Such  liabilities  may,  and  often  do,  exceed  tenfold  his 
means,  apart  from  the  merchandise  in  the  purchase  of  which 
they  were  created.  He  is  expected  to  discharge  them  by  the 
sale  of  such  merchandise.  As  he  is,  however,  constantly 
liable  to  losses,  he  must  maintain  reserves  in  ratio  to  his 
liabilities ;  otherwise  no  one  would  trust  liim,  as  it  would  be 
seen  that  the  first  reverse  might  ruin  hun.  Witli  adequate 
reserves,  however,  the  more  favorable  rates  at  which  he  would 
be  able  to  purchase,  and  the  greater  degree  of  credit  he  would 
enjoy,  would  far  more  than  compensate  for  the  loss  of  interest 
on  his  reserves.  Capital  so  held,  therefore,  though  not  im- 
mediately productive,  may,  in  fact,  be  considered  as  the  most 
productive  and  the  most  usefully  employed  of  any  that  the 
merchant  may  hold.  A  very  large  amount  of  capital  is  ahvays 
necessarily  held  in  this  manner.  Every  person  has,  or  seeks 
to  have,  about  him  an  amount  of  money,  greater  or  less  ac- 
cording to  his  means  or  ability,  to  meet  future  demands  or 
opportunities ;  foregoing  interest  for  the  sake  of  having  the 
immediate  control  of  that  which  he  may  wish  to  use  or  spend. 
In  some  countries,  from  the  want  of  social  order  or  from  the 
rapacity  of  governments,  as  a  matter  of  safety  and  prudence 
interest  may  be  foregone  altogether.  In  all,  very  large 
amounts  of  capital  must  remain  without  drawing  interest,  in- 
volving a  sacrifice  for  a  greater  good  or  convenience.  It  is  a 
loss  which  society  makes  to  secure  a  greater  advantage  or  gain. 
If  Aristotle,  Hume,  Smith,  and  other  Economists,  in  place 
of  declaring  money  to  have  only  a  fictitious  or  conventional 
value,  or  its  value  and  productions   to   be   less    than  those 


118  HISTOEY   OF  MONETARY  THEORIES. 

of  other  kinds  of  property,  had  set  themselves  to  work  to 
explain  the  phenomenon  of  the  universal  demand  for  money 
at  usury,  the  history  of  Political  Economy  would  have  been 
wholly  different.  Money  was  in  as  active  demand  when 
Aristotle  wrote  as  to-day.  The  rate  in  Greece  on  such  as  was 
borrowed  to  be  used  in  mercantile  adventures  averaged  30  per 
cent  per  annum,  commerce  being  subject  to  much  greater  risks 
than  at  the  present  time.  It  was  equally  in  demand,  though 
loaned  at  less  rates,  at  the  time  of  Smith  and  Hume.  Why 
should  not  such  a  demand  have  been  accepted  as  evidence  of 
value  ?  The  reason  was  the  absurd  dogma  of  Aristotle,  which 
no  writer  till  Bentham  ever  assumed  to  controvert. 

As  interest  to  be  received  on  loans  of  capital  is  a  prime 
factor  in  human  affairs;  as  it  is  one  of  the  most  powerful 
motives  to  industry  and  exertion  ;  as  it  is  the  great  conservator 
of  social  order  ;  as  upon  it  rest  institutions  indispensable  to  the 
alleviation  of  human  weakness  and  distress,  and  to  the  promo- 
tion of  the  moral,  intellectual,  and  physical  welfare  of  the 
race,  without  wliich  it  would  relapse  into  a  condition  of  com- 
parative barbarism,  —  to  wholly  overlook  it  in  a  work  the 
object  of  which  is  to  treat  of  the  laws  upon  which  such  welfare 
rests,  marks  such  a  want  of  the  proper  comprehension  of  the 
subject  as  to  throw  a  well-grounded  distrust  over  Avhatever 
conclusions  its  author  may  undertake  to  e^ablish.  No  reli- 
ance can  be  placed  upon  those  derived  from  premises  from 
wliich  the  most  important  element  is  wholly  excluded.  It  is 
like  an  attempt  to  solve  complex  geometrical  propositions,  tak- 
ing no  account  of  elemental  truths.  The  conclusions  arrived  at 
would  be  mere  hap-hazard  guesses,  which  might  never  coincide 
with  the  law  or  fact.  Such  guesses  were  Smith's  conclusions 
in  his  work  on  Political  Economy.  It  cannot  be  otherwise 
with  any  work  of  the  kind  tiU  the  principles  upon  which  the 
science  treated  of  rests  are  adequately  established.  Those 
upon  which  the  science  of  Political  Economy  rests,  if  there  be 
such  a  science,  are  to  be  found,  not  in  the  intellectual,  but  in 
the  moral  part  of  man's  nature.  When  proper  moral  condi- 
tions are  secured,  the  highest  possible  material  prosperity  is  the 
necessary  result. 

A  distinction  to  which  Smith  is  constantly  returning  is  the 
difference  between  the  wheel  of  circulation  and  the  goods  that 


ADAM    SMITH.  119 

are  circulated  by  it.  The  one,  he  tells  us,  is  wholly  different 
from  the  other.  Such  distinction  is  entirely  imaginary.  If  a  per- 
son possessed  of  1,000  barrels  of  flour  sell  it  for  $10,000  in 
gold,  the  flour  may  be  said  to  move  the  gold.  If  a  person  pos- 
sessed of  such  a  sum  in  gold  wish  to  purchase  its  equivalent 
in  flour,  the  gold  may  be  said  to  move  the  flour.  The  figure  of 
the  wheel  is  allowable  only  on  the  assumption  that  money,  as 
such,  is  not  capital ;  but  an  instrument  of  commerce,  like  a 
scale,  a  railroad  car,  or  a  steamboat.  The  wheels  of  the  rail- 
road car  may  very  properly  be  said  to  be  the  wheels  of  com- 
merce, because  they  are  constantly  moving  merchandise  the 
value  and  nature  of  which  has  no  relation  or  resemblance  to 
them  ;  but  to  call  one  kind  of  merchandise,  and  not  the  other 
for  wliich  it  is  exchanged,  a  wheel  of  commerce,  is  to  use 
illustrations  which  have  no  correspondence  in  nature,  but  are 
simply  inventions,  which  \\ath  the  indolent  or  superficial  take 
the  place  of  fundamental  principles  or  laws. 

Smith,  when  treating  of  money,  is  always  returning  to  his 
favorite  distinction  between  money  and  capital,  — between  the 
real  and  nominal  price  of  commodities. 

"  If,"  he  says,  "  a  guinea  be  the  weekly  pension  of  a  particular 
person,  he  can,  in  the  course  of  a  week,  purchase  with  it  a  certain 
quantity  of  subsistence,  conveniences,  and  amusements.  In  pro- 
portion as  this  quantity  is  great  or  small,  so  are  liis  real  riches,  his 
real  weekly  revenue.  His  weekly  revenue  is  certainly  not  equal  to 
the  guinea  and  to  what  can  be  purchased  with  it :  but  only  to  one  or 
other  of  these  two  equal  values  ;  and  to  the  latter  more  properly 
than  to  the  former;  —  to  the  guinea's  worth,  rather  than  to  the 
guinea. 

"  If  the  pension  of  such  a  person  was  paid  to  him,  not  in  gold,  but 
in  a  weekly  bill  for  a  guinea,  his  revenue  surely  would  not  so  prop- 
erly consist  in  the  piece  of  paper  as  in  what  he  could  get  for  it. 
A  guinea  may  be  considered  as  a  bill  for  a  certain  amount  of 
necessaries  and  conveniences,  upon  all  the  tradesmen  in  the  neigh- 
borhood. The  revenue  of  a  person  to  whom  it  is  paid  does  not  so 
properly  consist  in  the  piece  of  gold  as  in  what  he  can  get  for  it, 
or  in  what  he  can  exchange  it  for.  If  it  could  be  exchanged  for 
nothing,  it  would,  like  a  bill  upon  a  bankrupt,  be  of  no  more  value 
than  the  most  useless  piece  of  paper. 

"  Though  we  frequently  express  a  person's  revenue  by  the  metal 
pieces  which  are  annually  paid  to  him,  it  is  because  the  amount  of 
these  pieces  regulates  the  extent  of  his  power  of  purchasing,  or 
the  value  of  the  goods  which  he  can  annually  afford  to  consume. 
We  still  consider  his  revenue  as  consisting  in  the  power  of  pur- 


120  HISTORY  OF   MONETABY    THEOEIES. 

chasing  or  consuming,  and  not  in  the  pieces  which  convey  it.  .  .  . 
His  revenue,  therefore,  cannot   consist   of   these  metal  pieces,  of 
which  the  amount  is  so  much  inferior  to  its  value  ;  but  in  the  power 
of  purchasing,  —  in  the  goods  which  can  successively  be  bought  with 
them  as  they  circulate  from  hand  to  hand. 

"  Money,  therefore,  the  great  wheel  of  circulation,  the  great  in- 
strument of  commerce,  like  all  other  instruments  of  trade,  though 
it  makes  a  part  and  a  very  valuable  part  of  the  capital,  makes  no 
part  of  the  revenue  of  the  society  to  which  it  belongs  ;  and  tliough 
the  metal  pieces  of  which  it  is  composed,  in  the  course  of  their 
annual  circulation,  distribute  to  every  man  the  revenue  which 
properly  belongs  to  him,  they  make  themselves  no  part  of  that 
revenue."  ^  .  .  . 

"  It  is  not  the  guinea,  but  the  guinea's  worth,"  says  Smith, 
"  that  constitutes  a  person's  income."  Why  not  the  guinea  ? 
It  is  this  that  is  paid  him  as  his  income  ;  it  is  the  value  of  this 
which  enables  him  to  become  possessed  of  articles  necessary 
for  his  comfort  or  support.  Its  value  is  the  measure  of  his 
ability  to  purchase  such  articles.  What  is  gained  by  going 
beyond  the  guinea,  and  making  that  which  the  guinea  will  pur- 
chase the  measure  of  a  person's  income  ?  He  may  not  expend 
his  guineas  ;  but  may  accumulate  them  for  a  lifetime,  leaving 
them  for  his  heirs.  Would  he  be  all  that  time  without  any 
income  ?  Would  his  income  be  measured  by  what  he  might 
purchase  ?  If  he  hoarded  his  guineas,  would  not  he  have  the 
same  income  as  if  he  expended  them  as  fast  as  earned  ?  Or  he 
might  loan  his  guineas  at  interest,  and  in  this  way  be  receiving 
a  large  income,  never  expending  a  penny  of  the  principal. 
"If  gold  could  be  exchanged  for  nothing,"  says  Smith,  "it 
would  be  of  no  value."  It  is  not  a  great  stroke  of  genius  to 
tell  us  this.  He  might,  without  much  danger,  have  affirmed 
the  same  of  every  other  kind  of  property.  "  But,"  says 
Smith,  "  a  person's  income  cannot  be  said  to  be  equal  both  to 
the  money  that  is  paid  him,  and  the  goods  which  such  money 
can  purchase.  It  can  equal  only  the  one  or  the  other  of  these, 
and  the  latter  more  properly  than  the  former."  If  it  be  a  dis- 
covery to  find  out  that  one  does  not  equal  two,  then  Smith 
should  certainly  have  the  honor  of  making  it. 

From  the  consideration  of  metallic.  Smith  proceeds  to  that 
of  paper,  money :  — 

1  Wealth  of  Nations,  Book  ii.,  Chap.  ii. 


% 


I 


ADAM   SMITH.  121 

"The  machines  and  instruments  of  trade,  which  compose  the 
fixed  capital,  have  this  further  resemblance  to  that  part  of  the  cir- 
culating capital  which  consists  in  money:  that  as  every  savins  in 
the  expense  of  erecting  and  supporting  those  machines,  which  does 
not  diminish  the  productive  powers  of  labor,  is  an  improvement  of 
the  neat  revenue  of  the  society,  so  every  saving  in  the  expense  of 
collecting  and  supporting  that  part  of  the  circulating  capital  which 
consists  in  money  is  an  improvement  of  exactly  the  same  kind. 

"  It  is  sufficiently  obvious,  and  it  has  partly,'too,  been  explained 
already,  in  what  manner  every  saving  in  the  expense  of  supportin.fj- 
the  fixed  capital  is  an  improvement  in  the  neat  revenue  of  societ^\ 
The  whole  capital  of  the  undertaker  of  every  work  is  necessarily 
divided  between  his  fixed  and  his  circulating  capital.  While  his 
whole  capital  remains  the  same,  the  smaller  the  one  part  the 
greater  must  necessarily  be  the  other.  It  is  the  circulating  capital 
which  furnishes  the  materials  and  wages  of  labor,  and  pufs  indus- 
try in  motion.  Every  saving,  therefore,  in  the  expense  of  main- 
taining the  fixed  capital,  which  does  not  diminish  the  ])roductive 
powers  of  labor,  must  increase  the  fund  which  puts  industry  in 
motion,  and  consequently  the  annual  produce  of  the  land  and 
labor,  —  the  real  revenue  of  society.  The  substitution  of  paper  in 
the  I'oom  of  gold  and  silver  money,  replaces  a  very  expensive  in- 
strument of  commerce  with  one  much  less  costly,  and  sometimes 
equally  convenient.  Circulation  comes  to  be  carried  on  by  a  new 
wheel,  which  it  costs  less  both  to  erect  and  maintain  than  the  old 
one.  But  in  what  manner  this  operation  is  performed,  and  in  what 
manner  it  tends  to  increase  either  the  gross  or  the  neat  revenue  of 
the  society,  is  not  altogether  so  obvious ;  and  may,  therefore,  require 
some  further  explication. 

"  There  are  several  different  sorts  of  paper  money ;  but  the  cir- 
culating notes  of  Banks  and  bankers  are  the  species  which  is  best 
known,  and  which  seems  best  adapted  for  this  purpose.  When  the 
people  of  any  particular  country  have  such  confidence  in  the  for- 
tune, probity,  and  prudence  of  a  particular  banker  as  to  believe 
that  he  is  always  ready  to  pay  upon  demand  such  of  his  promis- 
sory notes  as  are  likely  to  be  at  any  time  presented  to  him,  these 
notes  come  to  have  the  same  currency  as  gold  and  silver  money, 
from  the  confidence  that  such  money  can  at  any  time  be  had  for 
them. 

"  A  particular  banker  lends  among  his  customers  his  own  prom- 
issory notes,  to  the  extent,  we  shall  suppose,  of  a  hundred  thou- 
sand pounds.  As  those  notes  serve  all  the  purposes  of  money,  his 
debtors  pay  the  same  interest  as  if  he  had  lent  them  so  much 
money.  This  interest  is  the  source  of  his  gain.  Though  some  of 
these  notes  are  continually  coming  back  upon  him  for  payment, 
part  of  them  circulate  for  months  and  years  together  ;  though  he 
has  generally  in  circulation,  therefore,  notes  to  the  extent  of  a 
hundred  thousand  pounds,  twenty  thousand  pounds  in  gold  and 
silver  may  frequently  be  sufficient  provision  for  answering  occa- 
sional demands.  By  this  operation,  therefore,  twenty  thousand 
pounds  in  gold  and  silver  perform  all  the  operations  which  a  hun- 


122  HISTORY   OF    MONETARY   THEORIES. 

dred  thousand  pounds  would  otherwise  have  performed.  The 
same  exchant^es  may  be  made  ;  the  same  quantity  of  consumable 
goods  may  be  circulated  and  distributed  to  their  proper  consum- 
ers, by  the  means  of  his  promissory  notes  to  the  value  of  a 
hundred  thousand  pounds,  as  by  an  equal  value  of  gold  and  silver 
money.  Eighty  thousand  pounds  of  gold  and  silver,  therefore, 
can  in  this  manner  be  spared  from  the  circulation  of  the  country  ; 
and,  if  different  operations  of  the  same  kind  should  at  the  same 
time  be  carried  on  by  many  different  Banks  and  bankers,  the  whole 
circulation  may  thus  be  conducted  with  a  fifth  part  only  of  the 
gold  and  silver  which  would  otherwise  have  been  requisite."  ^ 

"  There  are  several  kinds  of  paper  money,"  says  Smith  ;  "  but 
bank-notes  seem  to  be  the  best  to  serve  as  money,"  and  he 
therefore  makes  them  the  subject  of  his  discussion.  This 
paragraph  describes  exactly  the  nature  of  Smith's  mind,  and 
the  method  pursued  by  liim.  Bank-notes  seem  to  him  to  be 
the  best.  Why  did  he  not  tell  us  which  was  the  best  ?  Seem 
has  no  place  in  scientific  analysis.  It  belongs  purely  to  the 
deductive  method.  Had  Smith  devoted  himself  to  finding  out 
what  bank-notes  were,  instead  of  what  they  seemed  to  be,  he 
mififht  have  rendered  the  world  some  service  in  the  place  of 
pouring  forth  such  a  mass  of  unmeaning  verbiage  in  support  of 
vain  and  frivolous  distinctions,  which  had  no  existence  but  in 
his  own  imagination. 

Smith's  theory  of  the  issue  of  paper  money  was  this :  a 
banker  in  good  credit,  and  who  has  punctually  met  his  pajnnents, 
issues  his  notes  for,  say,  X  100,000.  These  he  pays  out,  no  matter 
for  what  objects.  If  the  amount  be  not  excessive,  — that  is,  if 
it  do  not  exceed  the  wants  of  the  community  for  currency,  — 
the  notes  will  remain  indefinitely  in  circulation.  A  few  of 
them  will  be  occasional!}^  presented  for  payment,  as  their  holders 
may  happen  to  want  coin.  For  such  occasional  calls,  it  will  be 
prudent  for  the  banker  to  keep  on  hand,  say,  £20,000  in  coin. 
The  measure  of  his  profit  will  be  the  excess  of  interest  on  his 
notes  over  and  above  that  on  his  reserves.  By  this  substitu- 
tion, £80,000  of  coin  are  discharged  from  circulation,  while  the 
exchanges  of  the  community  will  be  effected  equally  well  as 
with  the  corresponding  amount  of  coin.  In  all  this,  he  assumed 
that  the  operations  referred  to  were  all  based  upon  credit,  ex- 
cept the  provision  of  £20,000  in  coin  ;  that  the  notes  issued 

1  Wealth  of  Nations,  Book  ii.,  Chap.  ii. 


ADAJSI  SJtHTH.  123 

would  serve  as  instruments  of  exchange,  without  any  reference 
to  that  which  they  represented.  He  overlooked  the  fact,  that 
all  the  notes  issued  in  the  discount  of  bills  return  to  the  party 
issuing  them,  for  redemption  or  conversion,  within  periods  of, 
say,  four  months  from  their  issue  ;  that,  as  they  were  issued  in 
the  discount  of  bills,  they  must  be  returned  on  their  payment. 
That  they  were  not  demanded  in  coin,  or,  rather,  that  reserves 
of  .£20,000  in  coin  were  all  that  were  found  necessary  for 
the  banker  to  hold,  was  due  to  the  fact  that  he  issued  his  notes 
in  the  discount  of  business  paper,  and  that  the  payment  of  such 
paper  returned  to  him  his  notes  in  the  manner  already  de- 
scribed. If  he  discounted  only  such  notes  as  were  certain  to 
be  paid,  £10,000,  or  even  £5,000,  of  coin  reserves  might  be 
adequate.  The  notes  would  return  for  redemption  with  the 
same  certainty  and  regularity,  if  they  represented  capital  to 
their  full  amount,  as  if  they  did  not  represent  a  penny. 
Redemption  within  certain  periods  is  the  law  of  all  convertible 
currencies.  There  was  in  the  case  supposed  no  substitution  of 
credit  for  capital ;  only  that  instruments  other  than  coin  were 
used  for  the  exchange  or  distribution  of  a  corresponding 
amount  of  capital.  It  by  no  means  follows  that  there  is  any 
less  coin  in  a  community  for  the  use  of  symbols.  There  may 
be  a  far  greater  amount  from  its  increased  wealth  due  to  their 
use,  in  all  cases  in  which  they  can  be  used  instead  of  coin. 

To  quote  again  :  — 

"  Let  us  suppose,  for  example,  that  the  whole  circulating  money 
of  some  particular  country  amounted  at  a  particular  time  to 
£1,000,000,  that  sum  then  being  sufficient  for  circulating  the  whole 
annual  produce  of  their  land  and  labor.  Let  us  suppose,  too,  that 
sometime  thereafter  different  Banks  and  bankers  issued  promissory 
notes  payable  to  the  bearer,  to  the  extent  of  £1,000,000,  reserving 
in  their  different  coffers  £200,000  for  answering  occasional  demands. 
There  would  remain,  therefore,  in  circulation,  £800,00.0  in  gold  and 
silver,  and  £1,000,000  of  bank-notes,  or  £1,800,000  of  paper  and 
money  together.  But  the  annual  produce  of  the  land  and  labor  of 
the  countTy  had  before  required  only  £1,000,000  to  circulate  and 
distribute  it  to  its  proper  consumers,  and  that  annual  produce  can- 
not be  immediately  augjmented  by  the  operations  of  banking. 
£1,000,000,  therefore,  wih  be  sufficient  to  cin-ulate  it  after  them. 
The  goods  to  be  bought  and  sold  being  precisely  the  same  as  before, 
the  same  quantity  of  money  will  be  sufficient  for  buying  and  selling 
them.  The  channel  of  circulation,  if  I  may  be  allowed  such  an 
expression,  will  remain  precisely  the  same  as  before.    £1,U0U,0U0 


124  HISTORY   OF   MONETARY  THEORIES. 

we  have  supposed  sufficient  to  fill  that  channel.  W^''^^^^'^^' 
therefore,  is  poured  into  it  beyond  that  sum,  cannot  run  in  it,  but 
must  overflow  :  £1,800,000  are  poured  into  it ;  £800,000,  therefore, 
must  overflow,  that  sum  being  over  and  above  what  can  be  em- 
ployed in  the  circulation  of  the  country.  But  though  this  sum 
cannot  be  employed  at  home,  it  is  too  valuable  to  be  allowed  to  lie 
idle.  It  will,  therefore,  be  sent  abroad,  in  order  to  seek  that  prof- 
itable employment  which  it  cannot  fiml  at  home.  But  the  paper 
cannot  go  abroad,  because  at  a  distance  from  the  Banks  which 
issue  it,  and  from  the  country  in  which  payment  of  it  can  be 
exacted  by  law,  it  will  not  be  received  in  common  payments. 
Gold  and  silver,  therefore,  to  the  amount  of  £800,000  will  be  sent 
abroad,  and  the  channel  of  home  circulation  will  remain  filled  with 
£1,000,000  of  paper  instead  of  the  £1,000,000  of  those  metals 
which  filled  it  before.  ... 

"When  paper  is  substituted  in  the  room  of  gold  and  silver 
money,  the  quantity  of  the  materials,  tools,  and  maintenance  which 
the  whole  circulating  capital  can  supjily,  may  be  increased  by  the 
whole  value  of  gold  and  silver  which  used  to  be  employed  in  cir- 
culating them.  The  whole  value  of  the  great  wheel  of  circulation 
and  distribution  is  added  to  the  goods  which  are  circulated  and 
distributed  by  means  of  it,"  ^ 

The  effect  of  the  issue  of  £800,000  (whatever  its  character) 
of  currency  upon  a  community  accustomed  to  use  j£l,000,000 
in  coin  would  depend  entirely^  upon  that  which  the  paper 
money  represented.  It  is  to  be  remarked,  however,  that  no 
such  certain  or  methodical  issue  or  substitution  of  one  kind  oi 
currency  for  another  as  that  supposed  by  Smith  is  possible. 
The  use  of  a  symbolic  currency  is  evidence  of  a  high  inttdlect- 
ual  and  moral  condition.  Such  currency,  valueless  in  itself, 
is  taken,  like  a  bill  of  exchange,  upon  the  faith  that  it  is  what 
it  is  represented  to  be,  —  the  evidence  of  capitiil,  —  and  that  it 
will  secure  to  its  holder  such  capital.  We  should  no  more 
expect  to  find  in  Spain  or  Turkey  the  currency  of  New  Eng- 
land as  it  was,  or  Scotland,  than  we  should  expect  to  find  in 
them  the  skill  of  the  latter  in  the  mechanic  arts.  A  good  cur- 
rency, like  elaborate  mechanical  contrivances,  is  a  growth,  not 
an  improvisation.  No  people  ever  said  to  themselves,  "  We 
have  put  up  with  an  expensive  currency  of  coin  long  enough, 
we  will  now  try  the  cheaper  one  of  paper  ; "  any  more  than 
they  said  to  themselves,  "  We  have  put  up  with  poor  mechan- 
ical contrivances  long  enough,  we  will  henceforth  use  only  such 

1  Wealth  of  Nations,  Book  ii.,  Chap.  ii. 


ADAM  S:MITH. 


125 


as  are  most  perfectly  adapted  to  their  ends."     Progress  in  dis- 
tribution, so  that  it  maybe  cheaply  and  expeditiously  effected, 
is  much  more  gradual  than  in  production  whereby  quantity  is 
increased  and   quality  improved.      Intellectual   training  will 
suffice  for  the  latter ;  but  for  the  former  moral  qualities  must 
always  be  superadded.     Symbolic  currencies  have  come  into 
use  very  gradually.     They  were  never  resorted  to  for  the  pur- 
pose of  discharging  from  use  a  corresponding  amount  of  coin  ; 
neither  did  their  use  necessarily  discharge  from  employment  a 
corresponding  amount  of  coin  ;  neither  would  they  (provided 
they   represented   capital)    increase   the   relative   amount    of 
money,  as  capital  would  necessarily  exist  in  the  same  ratio. 
In  such  case,  the  channel  of  circulation  (if  the  figure  may 
be  used)  would  never  overflow,  no  matter  the  magnitude  of 
the  current.      The  banks   would   recede   and  contract  with 
the  current.     Smith,  however,  assumed  in  his  illustration  the 
increase  in  paper   money  to  be  without  a  corresponding  in- 
crease in  capital ;  and  that  an  equal  amount  of  coin,  discharged 
from  employment   as   currency,  would  be  immediately  sent 
abroad  as  merchandise.     But  even  if  the  .£800,000  of  paper 
money  had  been  pui-ely  fictitious, — that  is,  if  it  had  represented 
nothing  but  the  promises  of  the  issuers,  —  still  the  channel  of 
circulation  would  no  more  have  overflowed  than  if  the  new 
issue  had  represented  a  corresponding  amount  of  capital.     As 
the  instruments  of  expenditure,  in  excess  of  capital,  were  in- 
creased, prices  would  rise  in  like  ratio,  so  that  relative  to 
prices,  the    amount    of   money  might  not   have  increased  a 
dollar.     Till  prices  reached  their  maximum,   there  woidd  be 
an    active    demand    for    all    kinds    of   merchandise,    foreign 
as  well  as  domestic  :   and  under  the  increased   demand  im- 
portations would  be  increased ;    to  be   paid   for  not  by   ex- 
ports of  merchandise,  but  of  the  coin  reserves  of  the  country. 
It  would  never  occur  to  the  holders  of  this  coin  that  they 
must  send  it  out  of  the  country  to  find  employment  for  it, 
or  to  get  its  worth.     Such  as  they  had  to  spend  would  be  ex- 
pended on  objects  lying  immediately  about  them  ;  and,  if  any 
portion  went  out  of  the  country,  it  would  be  in  payment  of 
merchandise  for  which  the  ordinary  exports  of  the  country  no 
longer  sufficed.     The  expenditure  would  be  made  long  before 
any  one  dreamed  of  exporting  gold.     In  all  these  operations, 
there  would  be  no  plan  or  method,  nor  would  it  be  supposed 


126  HISTORY   OF   MONETARY   THEORIES. 

that  any  shipments  of  coin  would  be  necessary.  When  an 
adverse  movement  of  specie  begins,  people  are  always  sur- 
prised, and  wonder  what  can  be  the  cause.  As  they  are  always 
sure  to  apply  the  proper  remedy  so  soon  as  the  movement 
appears  to  be  a  strong  one,  they  would  never,  had  they  foreseen 
the  consequences,  have  placed  themselves  in  a  position  from 
which  they  immediately  seek  to  escape.  Coin,  too,  can  be 
much  better  spared  when  it  is  the  sole  currency,  than  when  a 
symbolic  one  is  used  in  connection  with  it.  In  the  latter  case, 
a  reduction  of  one  dollar  in  coin  may  be  equivalent  to  the 
reduction  of  five  or  ten  dollars  in  the  volume  of  S}Tnbols. 
Hence  the  extreme  sensitiveness  of  such  countries  as  England 
to  the  slightest  foreign  demand  for  specie.  The  illustration, 
therefore,  that  the  moment  a  paper  currency  is  used  people 
methodically  send  abroad  a  corresponding  amount  of  coin,  is 
preposterous.  The  moment  a  s^'rabolic  currency  is  issued  to 
the  extent  supposed  by  Smith,  coin  is  carefully  collected  by 
the  issuers  of  currency,  as  they  can  increase  their  issues  in 
fivefold  or  greater  ratio  to  the  amount  they  hold.  As  soon  as 
a  symbolic  currency  begins  to  be  issued,  the  motive  to  retain 
specie  in  the  country  becomes  all  the  stronger  in  ratio  to  the 
amount  of  issue  of  such  currency. 

"  "When  we  compute,"  says  Smith,  "  the  quantity  of  industry 
which  the  circulating  capital  of  aily  society  can  employ,  we  must 
always  have  regard  to  those  parts  of  it  only  which  consist  in  pro- 
visions, materials,  and  finished  work ;  the  other,  which  consists  in 
money,  and  which  serves  only  to  circulate  these  three,  must  always 
be  deducted.  In  order  to  put  industry  in  motion,  thi'ee  things  are 
requisite  :  materials  to  w^ork  upon,  tools  to  work  with,  and  the  wages 
or  recompense  for  the  sake  of  which  the  work  is  done.  ]Money  is 
neither  a  material  to  work  upon,  nor  a  tool  to  work  with  ;  and, 
though  the  wages  of  the  workmen  are  commonly  paid  to  them  in 
money,  their  real  income  consists,  not  in  the  money,  but  in  the 
money's  worth,  —  not  in  the  metal  pieces,  but  in  what  can  be  got  for 
them. 

"  The  quantity  of  industry  which  any  capital  can  employ  must 
evidently  be  equal  to  the  number  of  workmen  whom  it  can  supply 
with  materials,  tools,  and  maintenance  suitable  to  the  workmen  ; 
but  the  quantity  of  industry  which  the  whole  capital  can  employ 
is  certainly  not  equal  both  to  the  money  which  purchases,  and  to 
the  materials,  tools,  and  maintenance  which  are  purchased  with 
it :  but  only  to  one  or  other  of  these  two  values  ;  and  to  the  latter 
more  properly  than  to  the  former."  ^     "  Money,"  he  continues  in 

1  Wealth  of  Nations,  Book  ii.,  Chap.  ii. 


ADAM   SMITH.  127 

a  subsequent  part  of  the  Avork,  "  no  doubt  always  makes  a  part  of 
the  national  capital ;  but  it  has  already  been  shown  that  it  generally 
makes  only  a  small  part,  and  always  the  most  unprofitable  part 
of  it."  1  ^ 

If  money  be  capital,  or  the  evidence  of  capital,  then  the 
amount  of  industry  which  any  society  can  employ  must  be  in 
ratio  to  its  quantity.     Money,  in  the  form  of  coin,  is  capital, 
and  as  material,  is  constantly  passing  into  the  arts.    It  is  capi- 
tal, in  being  at  all  times  exchangeable  at  its  cost  for  all  other 
articles  of  property.     It  is  capital,  in  being  always  in  demand 
at  interest.     It  is  one  of  the  most  valuable  of  tools  or  instru- 
ments, as  without  it  no  exchanges  could  be  made,  nor  could 
other  kinds  of  property  have  any  exchangeaV)le  value.     But 
for  money,  there   could  in  fact,  be  no  property  worthy  the 
name.     If  it  be  symbolic,  it  measures,  so  far,  the  quantity  of 
merchandise  in  a  countr}^  entering  into  consumption ;    and  is 
the  instrument,  and  the  only  one,  by  which  the  capital  of  a 
community  in  the  form  of  merchandise  can  be  loaned  in  any 
considerable  amount.      When  loans  by  coin  are  made,  the  coin 
itself  is  loaned.     When  loans  are  made  by  means  of  symbolic 
currency,   merchandise,    or   that   which   will   purchase   it,  is 
loaned.     Loans  made  by  the  issue  of  symbols  are  just  as  useful 
to  the  borrower  as  loans  made  in  coin.     What  he  wants  is  cur- 
rency, —  that  which  will  reach  some  other  article  of  merchan- 
dise.    The  quantity  of  industry,  therefore,  which  any  society 
can  employ  must   be   in   direct   ratio  to  the  amount  of   its 
money,  in  whatever  form.     Smith's  assumption,  that,  in'estimat- 
ing  the  quantity  of  labor  that  can  be  employed,  money  is  to 
be  entirely  excluded  from  the  calculation,  is  exactly  opposed 
to  the  fact.     That  the  quantity  of  industry  which  the  capital 
of  any  society  can  employ  is  equal  both  to  the  money  which 
purchases,  and  to  the  materials,  tools,  and  maintenance  which 
are  purchased  with  it,  is  a  suggestion  too  puerile  and  absurd  for 
comment.     To  the  assertion   that   money  always   forms  the 
least  productive  part  of  the  capital  of  society,  it  is  sufficient 
to  reply,  that  every  kind  of  property  necessary  to  its  opera- 
tions is  to  be  considered  equally  valuable  and  equally  pro- 
ductive. 

1  Wealth  of  Nations,  Book  iii.,  Cliap.  i. 


128  HISTORY  OF  MONETARY  THEORIES. 

Again :  — 

"  What  is  the  proportion  which  the  circulating  money  of  any- 
country  bears  to  the  whole  value  of  the  annual  produce  circulated 
by  means  of  it,  it  is,  perhaps,  impossible  to  determine.  It  has 
been  computed  by  different  authors  at  a  fifth,  at  a  tenth,  at  a 
twentieth,  and  at  a  thirtieth,  part  of  that  value.  But  how  small 
soever  the  proportion  which  the  circulating  money  may  bear  to  the 
whole  value  of  the  annual  produce,  as  but  a  part,  and  frequently 
b^^t  a  small  part,  of  that  produce  is  ever  destined  for  the  mainte- 
nance of  industry,  it  must  always  bear  a  very  considerable  jiropor- 
tion  to  that  part.  When,  therefore,  by  the  substitution  of  paper, 
the  gold  and  silver  necessary  for  circulation  are  reduced  to  perhaps 
a  fifth  part  of  the  former  quantity,  if  the  value  of  only  the  greater 
part  of  the  other  four-fifths  be  added  to  the  funds  which  are 
destined  for  the  maintenance  of  industry,  it  must  make  a  very  con- 
siderable addition  to  the  quantity  of  that  industry,  and  consequently 
to  the  value  of  the  annual  produce  of  land  and  labor."  ^ 

The  proportion  whicli  the  money  of  the  country  bears,  or 
should  bear,  to  its  capital  or  property  in  other  forms,  is  a  mat- 
ter of  very  little  speculative  importance.  So  long  as  such 
money  consists  of  the  precious  metals,  the  necessities  of 
society  or  business  will  always  tend  to  a  proper  adjustment  of 
the  relative  amounts  of  the  two.  No  theory,  speculation,  or 
method  can  change  them.  This  is  a  matter  which  must  be 
left  to  the  operation  of  natural  laws.  If  there  be  such  an 
excess  of  coin  in  one  country  that  its  relative  value  in  it  is 
reduced,  such  excess  will  move  off,  by  its  own  gravity,  to 
places  or  countries  where  it  is  in  less  relative  abundance. 
Paper  money,  on  the  other  hand,  is  not  capital.  It  is  the  evi- 
dence of  capital ;  and  such  evidences,  provided  they  be  of  mer- 
chandise entering  into  consumption,  serve  all  the  functions  of 
coin  as  currency.  As  the  parties  having  the  right  to  such 
merchandise,  or  its  equivalent  in  coin,  should  always  be  pos- 
sessed of  the  evidences  of  such  right,  it  follows  that  paper 
money  should  equal  in  its  nominal  amount  that  of  such  mer- 
chandise,—  in  other  words,  that  the  symbol  should  always  cor- 
respond to  the  substance  ;  that  the  money  of  commerce  should 
equal  the  merchandise  of  commerce.  There  is  a  uniform 
tendency  to  such  equalization  in  all  countries  making  use  of  a 
symbolic  currency.     There  is  the  same  reason  why  all  articles 

1  Wealth  of  Nations,  Book   ii.,  Chap.  ii. 


AD  AIM   SlSnTH.  129 

entering  into  consumption  should  be  syml3olized  as  that  any- 
one should  be.  In  England,  nearly  the  whole  amount  of  the 
merchandise  entering  into  consumption  is  symbolized.  The 
money  of  that  country  approaches  in  its  nominal  value  to  that 
of  her  merchandise.  Such  a  condition  of  things  could  by  no 
means  be  possible  but  for  the  high  moral  qualities  of  her  peo- 
ple, which  lead  a  merchant  or  a  banker  in  London  to  confide  as 
implicitly  in  the  undertakings  of  a  merchant,  banker,  or  manu- 
facturer in  Liverpool  or  Glasgow,  as  in  those  of  his  immediate 
neighbors.  Domestic  order  is  also  a  necessary  condition  to  the 
use  of  such  a  currency.  It  is  impossible,  for  the  reasons 
stated,  that  it  should  be  used  to  any  considerable  extent  in 
Turkey  or  in  Spain,  or  in  the  Southern,  in  the  same  degree  as 
in  the  Northern  United  States  of  America. 

Smith  assumes  that  the  only  gain  in  the  use  of  paper  money 
is  in  the  displacement  of  a  corresponding  amount  of  coin,  and 
in  its  conversion  into  other  uses  than  that  of  currenc3^  It, 
however,  by  no  means  follows  that  the  use  of  a  symbolic  cur- 
rency diminishes  the  amount  of  metallic  currency  in  a  country. 
This  is  a  matter  which  can  never  be  accurately  determined.  It 
may  be  that  the  increase  in  production  and  trade,  and  conse- 
quently in  wealth,  and  the  necessity  of  providing  reserves  ade- 
quate for  the  maintenance  of  a  very  large  amount  of  sjTubolic 
currency,  may  call  for  the  use  of  a  larger  amount  of  coin  than 
could  have  been  maintained  in  circulation  without  the  use  of 
symbols.  Be  this  as  it  may,  the  advantages  of  discharging  a 
certain  amount  of  coin  from  use,  by  means  of  paper  money,  are 
really  insignificant  compared  with  those  which  flow  from  its 
use.  Without  it,  the  commerce  and  wealth  of  such  countries 
as  Great  Britain  and  the  United  States  could  not  have  reached 
one-fifth  of  their  present  prodigious  proportions. 

Again  :  — 

"  The  whole  paper  money  of  every  kind  which  can  easily  circu- 
late in  any  country  can  never  exceed  the  value  of  the  gold  and 
silver  of  which  it  supplies  the  place,  or  which  (the  commerce  being 
supposed  the  same)  would  circulate  there  if  there  were  no  paper 
money.  If  twenty  shilling  notes,  for  example,  are  the  lowest 
paper  money  current  in  Scotland,  the  whole  of  that  currency  tliat 
could  easily  circulate  there  cannot  exceed  the  sum  of  gold  and 
silver  which  would  be  necessary  for  transacting  the  annual  ex- 
changes of  twenty  shillings'  value  and  upwards  usually  transacted 

9 


130  HISTORY   OF   MONETARY  THEORIES. 

in  that  country.  Should  the  circulating  paper  at  any  time 
exceed  that  sum,  as  the  excess  could  neither  be  sent  abroad  nor 
employed  in  the  circulation  of  the  country,  it  must  return  immedi- 
ately upon  the  Banks  to  be  exchanged  for  gold  and  silver.  JNIany 
people  would  immediately  perceive  that  they  had  more  of  this 
paper  than  was  necessary  for  transacting  their  business  at  home ; 
and,  as  they  could  not  send  it  abroad,  they  would  immediately  de- 
mand payment  for  it  at  the  Banks.  When  this  superfluous  paper 
was  converted  into  gold  and  silver,  they  could  easily  find  a  use  for 
it  by  sending  it  abroad  ;  but  they  could  find  none  while  it  remained 
in  the  shape  of  paper.  There  would  immediately,  therefore,  be  a 
run  upon  the  Banks  to  the  whole  extent  of  this  superfluous  paper ; 
and,  if  they  showed  any  difiiculty  or  backwardness  in  payment,  to 
a  much  greater  extent,  the  alarm  which  this  would  occasion  neces- 
sarily increasing  the  run."  ^ 

In  the  preceding  paragraph  Smith  asserts  a  principle  which 
has  since  become  a  dogma  with  all  succeeding  Economists,  that 
the  amount  of  paper  money  that  can  be  maintained  in  circula- 
tion can  never  exceed  the  amount  of  coin  the  place  of  which  it 
supplies.  A  few  remarks  will  show  its  utter  absurdity.  The 
currency  of  liis  own  country,  Scotland,  when  he  wrote, 
equalled,  he  tells  us,  £'2,000,000,  of  which  gold  and  silver 
constituted  only  £500,000.  If  we  add,  to  the  X  1,500,000  of 
notes  in  circulation,  ,£500,000,  as  the  deposits  in  the  Banks, 
which  are  currency  equally  with  the  notes,  the  total  circulation 
of  the  country  equalled  £2,500,000.  The  circulation  of  the 
Scotch  Banks,  including  deposits,  in  1873,  was  £82,000,000; 
the  coin  reserves  equalled  about  £5,000,000  ;  the  coin  actually 
in  circulation  equalled,  probably,  as  much  more  :  making  a 
total  currency  of  £92,000,000.  The  increase  of  currency  in 
Scotland  in  the  hundred  years,  consequentl)%  has  been 
£89,500,000.  The  amount  of  coin  displaced  by  the  issue  of 
notes  has  been,  according  to  Smith,  £82,000,000. 

It  is  absurd  to  suppose  if  there  had  been  no  increase  of 
paper  money  in  Scotland,  that  the  amount  of  coin  in  circula- 
tion in  it  would  have  equalled  £90,500,000  —  a  sum  nearly 
equalling  the  estimated  amount  in  circulation  in  the  United 
Kingdom  at  the  present  time.  The  total  amount  of  coin  in  Eng- 
land in  1776  was  estimated  at  the  time  at  about  £20,000,000  ; 
the  notes  of  the  Bank  of  England  in  circulation  equalled 
about  £8,000,000 ;  deposits  about  £5,000,000  ;  the  circulation 

1  Wealth  of  Nations,  Book  ii.,  Chap.  ii. 


ADAM  SMITH.  13X 

of,  and  deposits  with,  private  Banks  and  bankers,  iG 5,000,000 : 
the  total  being  X38,000,000,  of  which  £18,000,000  was  made 
up  of  symbols.  The  currency  in  circulation  in  England  at 
the  present  time,  according  to  Palgrave,  equals,  probably, 
£100,000,000  of  specie  and  £550,000,000  of  various  kinds 
of  paper,  making  a  total  of  £650,000,000  against  £38,000,000 
a  hundred  years  ago.  According  to  Smith,  the  paper  money 
put  in  circulation  within  the  century  must  have  displaced 
£532,000,000  of  coin  —  an  assumption  utterly  incredible.  With 
a  specie  currency  only,  there  are  limitations  to  production  and 
distribution  beyond  which  they  cannot  pass.  A  point  would 
soon  be  reached  in  which,  as  in  the  speed  of  locomotive  trains, 
the  loss  and  inconvenience  suffered  would  exceed  all  the  profit 
to  be  derived  from  business  operations.  In  widely  extended 
communities,  like  those  of  the  United  States,  gold  and  silver 
could  never  adequately  fill  the  place  of  a  symbolic  currency  ; 
and,  if  the  latter  should  be  disused,  they  would  be  forced  to  an 
enormous  contraction  of  production  and  trade. 

According  to  Smith,  if  an  amount  of  paper  money  at  any 
time  exceed  that  of  the  metallic  money  displaced,  the  excess 
must  return  immediately  to  the  Banks  to  be  exchanged  for 
coin.  "  Many  people,"  he  repeats,  "  would  immediately  per- 
)  ceive  that  they  had  more  of  this  paper  than  was  necessary  for 
the  transaction  of  their  business  at  home  ;  and,  as  they  could 
not  send  it  abroad,  they  would  immediately  demand  payment 
for  it  at  the  Banks.  When  the  surplus  paper  was  converted 
into  gold  and  silver,  they  could  easily  find  use  for  it  by  send- 
ing it  abroad ;  but  they  could  find  none  while  it  remained  in 
the  shape  of  paper."  How  does  paper  money  get  into  circu- 
lation ?  From  the  confidence  reposed  in  it.  Those  who  receive 
it  believe  that  it  will  secure  to  them,  as  currency,  the  same 
values  of  merchandise  as  an  equal  amount  of  currency  of  coin ; 
otherwise  they  would  not  have  received  it.  So  long  as  such 
confidence  remains,  —  in  other  words,  so  long  as,  in  the  case  sup- 
posed by  Smith,  it  can  be  exchanged  at  Bank  for  coin,  —  it  will 
be  so  exchanged  only  when  the  holders  of  the  same  wish  to 
obtain  coin  for  use  in  the  arts,  or  in  payments  Avhere  coin  only 
will  be  accepted,  as  in  the  case  of  tender  in  satisfaction  of 
contracts.  It  never  yet  occurred  to  the  holder  of  a  note  con- 
vertible on  demand  into  coin,  that  he  must  go  to  the  Bank 


132  HISTORY  OF  MONETARY  THEORIES. 

and  exchange  it  for  coin  before  he  could  use  it  as  currency. 
Of  all  Smith's  fancies,  this  is  one  of  the  most  untenable  and 
absurd.  Even  if  foreign  merchandise  were  to  be  purchased, 
the  notes,  so  long  as  they  represented  merchandise,  would 
serve  the  holder  precisely  as  well  as  coin.  The  holder  of  the 
merchandise  to  be  purchased  would  receive  them  in  payment 
equally  with  coin.  He  may  pay  for  his  importations,  not  in 
coin,  but  by  bills  drawn  against  a  shipment  of  domestic  mer- 
chandise. The  drawer  of  such  bill  receives  such  notes  in  its 
sale  equally  with  coin,  as  he  can  pay  these  out  equally  with 
coin  in  the  payment  of  his  debts  or  in  the  purchase  of  labor  and 
material  in  the  production  of  his  industries.  As  a  rule,  specie 
is  hardly  more  necessary  in  foreign  than  in  domestic  trade,  — 
imports  being  paid  for  by  exports.  In  countries  that  do  not  pro- 
duce the  precious  metals,  the  two  must,  in  the  long  run,  nearly 
balance,  the  one  the  other.  The  amount  of  coin  required  in  a 
healthy  condition  of  trade,  only  equals  that  necessary  for  the 
discharge  of  balances,  which  may  not  equal  one  per  cent  of 
the  merchandise  moving  between  nations  or  between  commu- 
nities widely  separated.  Smith's  assumption,  therefore,  that 
all  excess  of  currency  over  and  above  that  necessary  to  effect 
the  exchanges  of  its  holders  must  be  returned  to  the  Banks 
for  coin,  before  it  can  be  used  as  money  or  capital,  is  a  pure 
fiction,  having  no  counterpart  whatever  in  any  transaction  in  ' 
real  life. 

Again :  — 

"  A  banking  company  which  issues  more  paper  than  can  be  em- 
ployed in  the  circulation  of  the  country,  and  of  which  the  excess 
is  continually  returning  upon  them  for  payment,  ought  to  increase 
the  quantity  of  gold  and  silver  which  tliey  keep  at  all  times  in 
their  coffers,  not  only  in  proportion  to  this  excessive  increase  of 
their  circulation,  but  in  much  greater  proportion  ;  their  notes  re- 
turning upon  them  much  faster  than  in  proportion  to  the  excess  of 
their  quantity.  Such  a  company,  therefore,  ought  to  increase  the 
first  article  of  their  expense,  not  only  in  proportion  to  this  forced 
increase  of  their  business,  but  in  much  greater  proportion.  .  .  . 

"  The  coffers  of  such  a  company,  too,  though  they  ought  to  be 
filled  much  fuller,  must  empty  themselves  much  faster  than  if  their 
business  was  confined  within  more  reasonable  bonds  ;  and  must 
require  not  only  a  more  violent,  but  a  more  constant  and  uninter- 
rupted, exertion  of  expense  in  order  to  replenish  them.  The  coin, 
too,  which  is  continually  drawn  in  such  large  quantities  from  their 
coffers  cannot  be  employed  in  the  circulation  of  the  country.  It 
comes  in  place  of  a  paper  which  is  over  and  above  what  can  be 


ADAM  SMITH.  133 

employed  in  that  circulation,  and  is,  therefore,  over  and  above 
what  can  be  employed  in  it  too.  But,  as  that  coin  will  not  be 
allowed  to  lie  idle,  it  must  in  one  shape  or  another  be  sent  abroad, 
in  order  to  find  that  profitable  employment  which  it  cannot  find  at 
home ;  and  this  continual  exportation  of  gold  and  silver,  by  en- 
hancing the  difiiculty,  must,  necessarily,  enhance  still  further  the 
expense  of  the  Bank  in  finding  new  gold  and  silver,  in  order  to 
replenish  their  coffers  which  empty  themselves  so  very  rapidly. 
Such  a  company,  therefore,  must,  in  proportion  to  this  forced  in- 
crease of  their  business,  increase  the  second  article  of  their 
expense  still  more  than  the  first."  ^ 

No  Bank  can  issue  "  more  paper  than  can  be  employed  in 
the  circulation  of  the  country,"  provided  such  issues  be  made 
in  the  discount  of  bills  representing  merchandise.  So  far  a 
perfect  equilibrium  is  maintained  between  money  and  mer- 
chandise. But  all  the  issues  of  paper  money,  not  the  excess 
alone,  return  regularly  and  within  very  short  periods  to  the 
Bank  for  redemption,  in  the  manner  already  described.  As 
they  were  issued  in  the  discount  of  bills,  they  must  be  returned 
in  their  payment.  The  whole  process  is  automatic,  so  long 
as  provision  for  their  conversion  is  provided  previous  to  their 
issue.  If  such  be  not  made  before  their  issue,  it  must 
be  made  subsequent  to  it,  and  ordinarily  out  of  the  re- 
serves of  the  Bank.  It  is  not  a  question  of  quantity,  but 
of  quality  or  kind.  There  can  never  be  too  much  of  a  symbolic 
currency  ;  there  can  never  be  too  little  of  such  as  is  not 
properly  symbolic.  For  the  one,  a  Bank  need  keep  on  hand 
only  a  small  percentage  of  coin  in  ratio  to  its  issues,  no  matter 
how  great  these  may  be  :  for  the  other,  it  must  keep  on  hand  an 
amount  equal  to  its  issues,  no  matter  how  small  these  may  be. 
With  Smith,  quantity  was  the  only  criterion  of  quality.  He 
wholly  overlooked  the  fact,  that  a  currency  not  issued  in  ex- 
cess has  to  be  redeemed  just  as  speedily,  and  to  the  same 
extent,  as  a  currency  issued  in  excess,  or  a  currency  that  has 
nothing  behind  it.  It  is  not  the  extent  but  the  character  of 
issues  of  paper  money  that  calls  for  large  reserves  of  coin.  So 
long  as  they  represent  capital,  —  so  long  as  they  will  secure  to 
their  holders  the  same  value  of  other  articles  as  coin,  —  there 
will  be  no  object  to  exchange  them  for  coin.  But  if  the  notes  of 
a  Bank  be  drawn  in  gold  and  silver,  why  may  not  the  latter  be 
as  profitably  employed   at  home  as  abroad?      Suppose   the 

1  "Wealth  of  Nations,  Book  ii.  Chap.  ii. 


134  HISTORY  OP  MONETARY  THEORIES. 

countries  to  which  they  were  sent  to  be  in  the  precise  condi- 
tion of  that  from  which  they  were  sent,  they  would  then  have 
to  be  sent  off  to  some  other.  If  all  had  their  proper  propor- 
tion of  currency  to  property,  such  gold  and  silver  as  currency 
would  find  a  resting-place  nowhere  ;  they  would  be  waifs 
which  no  one  would  touch.  If,  on  the  other  hand,  they  were 
capital,  they  could  as  well  be  employed  in  one  country  as 
another :  for  no  country  can  have  too  much  capital,  if  it  can 
have  too  much  currency.  But  no  country  can  have  too  much 
of  that  either,  if  it  be  capital,  or  its  representative.  In  the 
illustration  of  his  argument.  Smith  finds  himself  with  too  much 
money  on  hand  —  a  larger  quantity  than  that  necessary  to 
effect  the  exchanges,  — and  he  packs  it  off  without  ceremony, 
as  capital,  to  some  other  country.  He  should  certainly  have 
asked  himself  whether  it  might  not  be  possible  that  such 
money  might  not  be  as  unwelcome  and  out  of  place  abroad  as 
at  home ;  and  whether  it  might  not  be  immediately  returned 
without  breaking  the  wax.  In  such  an  event,  which  might 
be  more  than  probable,  his  treatise  could  certainly  not  be 
considered  complete  till  he  had  in  some  manner  disposed  of 
this  refractory  element  in  business  affairs. 

Smith  is  constantly  talking  of  the  expense  of  maintaining  a 
currency  which  is  in  excess  of  the  wants  of  a  community,  as  if 
it  cost  nothing  to  maintain  one  that  did  not  exceed  its  wants. 
It  costs  just  as  much,  in  ratio  to  its  amount,  to  maintain  a  cur- 
renc}^  which  equals  only  the  wants  of  the  people,  as  it  does  one 
that  exceeds  their  wants.  All  currencies  not  legal  tender 
have  to  be  taken  in  within  a  comparatively  short  time  from 
their  issue.  For  this  purpose,  an  adequate  amount  of  capital 
must  always  be  provided.  If  provided  in  merchandise  pre- 
vious to  their  issue,  they  convert  themselves,  in  being  returned 
to  the  Bank  in  payment  of  the  bills  in  the  discount  of 
wliich  they  were  issued.  If  such  provision  for  their  conver- 
sion be  not  made  previous  to  their  issue,  they  must  be  taken 
in  by  paying  out  therefor  a  corresponding  amount  of  coin. 
A  Bank,  when  it  commences  operations,  must  have  its  capital 
paid  in  either  in  coin,  or  the  notes  or  cheques  payable  in  coin 
of  other  Banks,  or  in  good  bills  given  for  merchandise,  and 
having  a  value  in  coin  equal  to  their  nominal  amount.  The 
substance  must  always  equal  the  symbol.      Such  substance 


ADAM   SMITH.  I05 

may  be,  and  usually  is,  in  the  hands  of  the  public.  It  does 
not,  necessarily,  ever  come  into  the  possession  of  the  Bank. 
It  must,  however,  be  provided  just  as  much  in  the  one  case  as 
the  other. 

Again :  — 

"What  a  Bank  can  with  propriety  advance  to  a  merchant  or 
nndertaker  of  any  kind,  is  not  either  the  whole  capital  with  which 
he  trades,  or  even  any  considerable  portion  of  that  capital,  but 
that  part  of  it  only  which  he  would  otherwise  be  obhged  to  keep 
by  him  unemployed,  and  in  ready  money  for  answering  occasional 
demands.  If  the  paper  money  which  the  Bank  adA\ances,  never 
exceeds  this  value,  it  can  never  exceed  the  value  of  the  gold  and 
silver  which  would  necessarily  circulate  in  the  country,  if  there 
were  no  paper  money ;  it  can  never  exceed  the  quantity  which  the 
circulation  of  the  country  can  easily  absorb  and  employ."  ^ 

A  Bank,  as  a  rule,  should  advance  nothing  to  merchants. 
If  they  conduct  their  business  properly,  they  have  no  need  of 
banking  accommodations.  They  have  abundant  capital  m  the 
merchandise  intrusted  to  them.  They  are  purchasers  on  time 
for  distribution.  It  is  their  bills  given  to  manufacturers, 
or  producers,  that  are  discounted.  Such  discounts  are 
made  to  supply  the  cost  of  such  merchandise  to  manufac- 
turers or  producers,  for  the  purpose  of  enabling  them  to  prose- 
cute their  industries  during  the  periods  for  which  the  credits 
are  given,  and  until  the  merchants  return  to  them  the  pro- 
ceeds of  their  sales.  It  is  only  when  merchants  have  made 
purchases  of  merchandise  which  they  cannot  sell  within  the 
time  within  which  their  bills  are  to  mature,  that  they  call  upon 
the  Banks  to  supplement  the  credits  first  given  to  the  manu- 
facturers. No  well-conducted  Bank  will  take  paper  manufac- 
tured by  merchants,  for  the  reason  that  by  doing  so  it  is 
making  loans  upon  merchandise  which  is  shown  to  be  unsal- 
able. No  loans  should  ever  be  made  to  an  undertaker  or 
contractor.  Undertakers  and  contractors  cannot  make  busi- 
ness paper.  It  is  their  object  to  get  the  j)ossession  of  merchan- 
dise for  their  own  use,  not  to  sell  it.  As  Smith  would  not 
allow  Banks  to  issue  a  greater  amount  of  currency  than  that 
necessary  to  be  held  by  merchants  to  meet  occasional  demands, 
it  is  plain  that  he  had  no  idea  of  the  nature  or  value  of  a  sym- 
bolic currency.     It  has  already  been  shown  that  such  currency, 

1  Wealth  of  Nations,  Book  ii.  Chap.  ii. 


136  HISTORY   OF   MONETARY   THEORIES. 

to  be  fully  adequate  to  its  objects,  should  equal  in  amount 
tbe  total  value  of  the  merchandise  entering  presentl}^  into  con- 
sumption. Paper  money  does  not  supersede  metallic  money  : 
it  only  supplements  it.  To  say,  therefore,  that  it  should  never 
exceed  in  amount  the  coin  previously  in  circulation,  is  to  say 
that  a  railroad  constructed  along  an  old  highway  should  never 
transport  a  greater  amount  of  merchandise  than  had  been 
transported  over  it.  The  railroad  may  still  leave  the  old  high- 
way well  employed,  while  reducing  the  cost  of  transportation 
five  or  ten  fold.  It  does  not  supersede,  it  supplements,  the 
old  highway  ;  and,  by  supplementing  it,  adds  almost  infinitely 
to  production  and  wealth. 

"  Whatever  currency  a  Bank  issues  over  and  above  what  a 
community  can  absorb,  is,"  says  Smith,  "  constantly  returning 
to  it  for  redemption."  A  country  Avill  absorb  all  the  currency 
it  can  get.  If  the  present  amount  of  United  States  notes 
should  be  quintupled,  the  country  would  absorb  them,  just  as  it 
has  absorbed  those  at  present  in  circulation,  which,  as  far  as  the 
exchanges  were  concerned,  were  wholly  superfluous.  Prices 
rose  in  ratio  to  the  amount  issued,  so  that,  so  soon  as  the  effect 
of  the  inflation  had  expended  itself,  money  was  in  no  greater 
relative  abundance  than  before.  So  with  the  issues  of  a  Bank. 
If  they  represented  consumable  merchandise,  the  country 
would  absorb  all  that  could  be  issued  ;  money,  in  the  mean 
time,  remaining  in  the  same  relative  abundance.  As  whatever 
was  issued  by  Banks  would  be  speedily  returned  to  them 
for  redemption,  and  would  have  to  be  retired  by  the  pajnnent 
of  coin,  provided  they  did  not  represent  merchandise,  the 
country  could  not  "  absorb  "  such  notes  a  second  time,  for  the 
very  good  reason  that  they  could  not  be  reissued.  When  a 
currency  is  irredeemable,  the  country  will  absorb  all  it  can  get, 
so  long  as  any  credit  whatever  is  attached  to  it.  It  can  absorb 
whatever  represents  capital,  for  the  reason  that  an  equilibrium 
is  in  such  case  maintained  between  prices  and  the  amount  of 
currency  issued. 

"  When  it  was  observed  that,  within  moderate  periods  of  time, 
the  repayments  of  a  particuhir  customer  were  upon  most  occasions 
fully  equal  to  the  advances  which  a  Bank  had  made  him,  it  might 
be  assumed  that  the  paper  money  which  had  been  advanced  to  him 
had  not  at  any  time  exceeded  the  quantity  of  gold  and  silver 


ADAM  s:\riTH.  137 

which  he  would  otherwise  have  been  obliged  to  keep  by  him  for 
answering  occasional  demands  ;  and  that,  consequently,  the  paper 
money  which  had  been  circulated  by  his  means  had  not  at  any 
time  exceeded  the  quantity  of  gold  and  silver  which  would  have 
circulated  in  the  country  had  there  been  no  paper  money.  The 
frequency,  regularity,  and  amount  of  his  repayments,  would  Puffi- 
ciently  demonstrate  that  the  amount  of  the  advances  made  had  at- 
no  time  exceeded  that  part  of  his  capital  which  he  would  other- 
wise have  been  obliged  to  keep  by  him  unemployed,  and  in  ready 
money  for  answering  occasional  demands,  .  .  . 

"  The  advances  of  the  Bank  paper,  by  exceeding  the  quantity  of 
gold  and  silver,  which,  had  there  been  no  such  advances,  he  would 
have  been  obliged  to  keep  by  him  for  answering  occasional  de- 
mands, might  soon  come  to  exceed  the  whole  quantity  of  gold  and 
silver  which  would  have  circulated  in  the  country  had  there  been  no 
paper  money,  and,  consequently,  to  exceed  the  quantity  which  the 
circulation  of  the  country  could  easily  absorb  and  employ ;  and  the 
excess  of  this  paper  money  would  immediately  have  returned  upon 
the  Bank  to  be  exchanged  for  gold  and  silver."  ^ 

As  prices  would  rise  in  ratio  to  the  amount  of  paper  money 
issued,  an  increase  of  currency  over  that  which  had  been  in 
use  would,  in  the  outset,  tend  to  make  merchants  more  prompt 
in  their-  pajTuents,  fi'om  a  corresponding  increase  of  demand 
for  merchandise.  Promptness  in  payment  would,  for  a  time, 
be  rather  an  evidence  of  an  excess  of  currency  than  other- 
wise. An  inflation,  or  an  excessive  issue,  of  paper,  might  go 
on  for  years,  even  when  the  currency  could  be  converted  on 
demand  into  coin,  provided  all  the  Banks  and  bankers  were 
affected  by  similar  sentiments,  and  moved  in  the  same  dii-ec- 
tion.  The  greater  part  of  the  notes  and  credits  issued  would 
be  retired  by  mutual  offset  in  the  manner  already  described ;  so 
that  only  a  small  amount  of  coin  might,  for  a  long  time,  be 
drawn.  In  this  way,  the  amount  of  paper  in  circulation  might 
very  largely  exceed  the  amount  that  could  eventually  be  sus- 
tained. In  time,  however,  some  event  or  another  would 
disclose  the  weakness  of  the  financial  situation,  of  wliich  the 
wisest  and  most  experienced  in  the  community  might,  up  to 
the  very  time  of  the  catastrophe,  be  almost  wholly  uncon- 
scious. Then  would  come  the  scramble,  —  the  sauve  qui  pent, 
—  which,  in  a  few  months,  might  reduce  the  currency  far 
below  the  point  at  which  it  stood  when  the  inflation  com- 
menced.     Even  in   such  a   case,   the   Banks  might  not  be 

1  Wealth  of  Nations,  Book  ii.  Chap.  ii. 


138  HISTORY   OF   MONETAHY  THEOEIES. 

compelled  to  suspend  specie  payment ;  but  they  might  lose  a 
very  considerable  portion  of  their  reserves,  and  might  require 
years  to  recover  the  ground  lost.  Unfortunately,  the  history 
of  Banks  is  one  of  constant  alternation  between  excessive 
issues  and  excessive  contractions.  The  first  lesson  is  yet  to  be 
learned  by  their  managers,  that  all  loans,  except  those  made 
upon  business  paper,  always  inflict  an  injury  upon  the  public, 
and  usually  recoil  with  greater  or  less  force  upon  those  mak- 
ing them. 

"It  is  not  by  augmenting  the  capital  of  the  country,"  says 
Smith,  "  but  by  rendering  a  greater  part  of  that  capital  active  and 
productive  than  would  otherwise  be  so,  that  the  most  judicious 
operations  of  banking  can  increase  the  industry  of  the  country. 
That  part  of  bis  capital  which  a  dealer  is  obliged  to  keep  by  him 
unemployed,  and  in  ready  money  for  answering  occasional  demands, 
is  so  much  dead  stock,  which,  so  long  as  it  remains  in  this  situa- 
tion, produces  nothing  to  himself  or  to  his  country.  ,  .  .  The  gold 
and  silver  money  which  circulates  in  any  country,  and  by  means 
of  which  the  produce  of  its  lands  and  labor  is  annually  dis- 
tributed to  the  proper  consumers,  is  in  the  same  manner  as  the 
ready  money  of  a  dealer  a  dead  stock.  It  is  a  very  valuable  part 
of  the  capital  of  the  country  which  produces  nothing  to  the 
country.  The  judicious  operations  of  banking,  by  substituting 
paper  in  the  room  of  the  greater  part  of  this  gold  and  silver,  en- 
ables the  country  to  convert  a  great  part  of  this  dead  stock  into 
active  and  productive  stock,  —  into  stock  which  produces  some- 
thing to  the  country.  The  gold  and  silver  money  which  circulates 
in  any  country  may  very  properly  be  compared  to  a  highway, 
which,  while  it  circulates  and  carries  to  market  all  the  grass  and 
corn  of  the  country,  produces  itself  not  a  single  pile  of  either. 
The  judicious  operations  of  banking,  by  providing  (if  I  may  be 
allowed  so  violent  a  metaphor)  a  sort  of  wagon-way  through  the 
air,  enable  the  country  to  convert,  as  it  were,  a  great  part  of  its 
highways  into  good  pastures  and  cornfields,  and  thereby  to  in- 
crease, very  considerably,  the  annual  produce  of  its  land  and 
labor.  .  .  . 

"  The  increase  of  paper  money,  it  has  been  said,  by  augmenting 
the  quantity,  and  consequently  diminishing  the  value,  of  the  whole 
currency,  necessarily  augments  the  money  price  of  commodities; 
but  as  the  quantity  of  gold  and  silver  which  is  taken  from  the 
currency  is  always  equal  to  the  quantity  of  paper  which  is  added 
to  it,  paper  money  does  not  necessarily  increase  the  quantity  of 
the  whole  currency."  ^ 

Smith's  assertions,  that  all  reserves  and  all  money  are  so 
much  dead  capital,  and  that  it  is   only  by  the  use  of  paper 

1  Wealth  of  Natioas,  Book  ii.  Chap.  ii. 


ADAM   SMITH.  139 

mone}^  that  gold  and  silver,  being  discharged  from  use  as  cur- 
rency and  exported,  can  produce  any  thing  to  a  country  hold- 
ing them,  have  been  sufficiently  refuted.  "  These  are,"  he  tells 
us,  "  like  highways,  which,  while  they  circulate  and  carry  to 
market  all  the  grass  and  corn  of  a  country,  produce  not  a  pile 
of  either."  He  forgot  that  it  was  the  highway  that  gave  the 
grass  and  corn  whatever  marketable  value  they  possessed  ; 
and,  that,  consequently,  the  highway  was  as  productive  as  were 
the  soils  upon  which  they  were  grown.  His  "  violent  meta- 
phor," that  a  judicious  process  of  banking  was  like  a  wagon 
way  through  the  air,  enabling  the  country,  as  it  were,  to  con- 
vert the  greater  part  of  highways  into  good  pastures  and  corn- 
fields, and  thereby  increase  the  annual  produce  of  its  land 
and  labor,  is  a  false  one  :  for  the  reason  that  as  there  may  be 
no  less  gold  in  a  country  possessing  a  symbolic  currency,  so 
there  are  no  fewer,  but  more,  ordinary  highways  for  every 
railway  that  is  constructed ;  showing  that  the  improvement 
does  not  supersede,  but  supplements,  the  old  method. 

Among  the  subjects  which  Smith  discussed,  as  having  an 
intimate  relation  to  that  of  money,  was  "  Balance  of  Trade," 
of  which  he  treats  in  the  chapter  in  the  "  Wealth  of  Nations," 
entitled  "  The  Principles  of  the  Commercial  or  Mercantile 
System."  As  there  has  been  no  subject  upon  which  the  Econ- 
omists have  been  better  agreed,  nor  one  more  thoroughly  mis- 
understood, it  may  be  well  to  set  out  briefly  the  ideas  and  condi- 
tions upon  wliich  this  system  was  founded ;  and  to  show,  that 
while  the  methods  resorted  to  were  calculated  to  defeat  the 
end  sought,  a  favorable,  or,  rather,  a  not  unfavorable,  "  Bal- 
ance of  Trade  "  is  that  which  is  always  uppermost  in  the 
minds  of  individuals  as  well  as  nations  ;  and  every  community, 
at  least  every  one  using  a  symbolic  cui-rency,  must  constantly 
look  to  it  that  the  "  Balance  of  Trade  "  is  not  adverse,  and 
must  be  able  to  prevent  the  withdrawal  of  an  excessive 
amount  of  coin,  and  to  recall  such  as  may  have  been  lost  from 
an  unfavorable  state  of  its  industries  and  trade. 

It  is  well  known  to  every  student  of  history,  that  the 
assumed  science  of  Political  Economy  is  a  modern  one.  Such 
part  of  it  as  relates  to  sj'mbolic  currencies  dates  from  the 
foimdation  of  the  Bank  of  England,  —  an  event,  or  institution, 


140  HISTORY   OF  MONETARY  THEORIES. 

which  has  changed  the  whole  face  of  modern  society.  Al- 
though somewhat  addicted  to  commerce,  the  Greeks  never 
appear  to  have  speculated  upon  subjects  coming  within  the 
range  of  the  economic  sciences.  Thek  industries  were  chiefly 
conducted  by,  and  their  incomes  derived  from,  the  labor  of 
slaves  ;  and  it  was  hardly  to  be  expected  that  subjects  or  call- 
ings which  were  held  by  the  wisest  and  best  of  their  race-  in 
disesteem,  or  as  contrary  to  nature,  should  be  thought  worthy 
to  be  erected  into  the  dignity  of  a  science.  The  Romans, 
never  a  commercial  or  manufacturing  people,  sustained  them- 
selves very  largely  by  war  during  the  period  of  their  con- 
quests ;  and  after  the  world  was  subjected  to  their  arms,  by 
requisitions  upon  the  provinces.  For  ages  the  race  was  under 
one  vast  military  regime^  which  left  no  room  for,  or  effectually 
stifled  all  discussion  upon  subjects  which  now  chiefly  engross 
the  attention  of  mankind. 

The  Northern  races  which  overthrew  the  Empire,  and  erected 
the  new  nationalities  upon  its  ruins,  were  radically  unlike  all 
that  preceded  them.  The  spirit  of  independence,  which  per- 
vaded them  all,  rendered  it  impossible  that  the  arms  of  one 
state  or  nation  should  become  paramount,  so  as  to  draw  from 
others  its  means  of  support.  Wealth,  consequently,  if  gained 
at  all,  had  finally  to  be  gained  by  industry  and  trade,  in  what, 
compared  with  Southern  Europe,  was  a  country  forbidding  in 
its  aspect,  and  possessed  of  a  cold  and  inhospitable  climate. 
Unlike  the  Romans,  all  the  Northern  nations  were  addicted  to 
adventure  and  to  nautical  life.  They  had  a  passion  for  wealth 
and  luxury  which  industry  and  commerce  could  alone  supply. 
The  new  civilizations,  consequently,  rested  upon  foundations 
wholly  different  from  the  old.  With  the  old,  almost  the  only 
idea  of  a  city  was  as  a  means  of  attack  or  defence ;  with  the 
new,  the  city  had  hardly  any  other  purpose  than  as  a  mart  of 
trade.  Those  founded  by  them  frequently  rose  to  great 
wealth  and  power  ;  and  combining  with  each  other,  like  the 
Hanse  Towns,  were  in  time  able  not  only  to  protect  their  com- 
merce and  industries,  but  to  oppose  an  effectual  resistance  to 
the  utmost  power  that  could  be  brought  against  them.  As 
freedom  is  the  necessary  condition  of  commerce,  these  cities 
became  the  asylums  and  champions  of  the  liberties  of  man- 
kind.    But  for  them,  these  could  not  have  survived  the  assaults 


ADA^kl  SMITH.  141 

alike  of  the  clerical  and  secular  powers.  But  for  the  commercial 
spirit  common  to  all  the  Northern  nations,  it  is  impossible  to 
see  how  the  race  could  ever  have  emancipated  itself  from  the 
influence  and  traditions  of  the  past,  and  fi'om  the  ignorance 
and  moral  degradation  which  preceded  and  followed  the  fall 
of  the  Empire. 

A  radical  distinction  between  the  old  and  the  new  civiliza- 
tions was  the  difference  in  the  esteem  in  which  the  useful  arts 
were  held.  In  the  reign  of  Athelstan,  in  the  early  part  of  the 
tenth  century,  a  merchant  who  made  three  foreign  voyages  in 
his  own  ship  was  ennobled.  Plato  banished  tradesmen  and 
mechanics  from  his  imaginary  Republic.  He  pronounced 
the  trade  of  a  shop-keeper  to  be  a  degradation  to  a 'freeman, 
and  wished  it  to  be  punished  as  a  crime.  Augustus  Csesar 
condemned  a  senator  to  death,  who  had  debased  his  rank  by 
taking  part  in  a  manufacture.  Cato  the  Elder,  on  being 
asked  what  he  thought  of  lending  money  at  usury,  repHed, 
"  What  do  you  think  of  the  crime  of  murder  ?  "  Aristotle 
everywhere  speaks  in  the  most  contemptuous  terms  of  artisans 
and  tradesmen,  who,  he  says,  are  not  to  be  classed  as  citizens, 
but  things  useful  to  the  state.     To  use  his  own  language  :  — 

"  In  the  best  governed  States,  where  the  citizens  are  really  of 
intrinsic,  and  not  of  negative  goodness,  none  of  them  should  be 
permitted  to  exercise  any  low  mechanical  employment  or  traffic,  as 
being  ignoble  and  destructive  to  virtue.  Neither  should  they  who 
are  destined  for  office  be  husbandmen  ;  for  leisure  is  necessary  in 
order  to  improve  in  virtue,  and  to  perform  the  duty  which  they  owe 
to  the  State. 

^ "  Every  work  is  to  be  esteemed  mean,  and  every  art  and  every 
discipline  as  well,  which  renders  the  body,  the  mind,  or  the  under- 
standing of  freemen  unfit  for  the  habit  and  practice  of  virtue  ;  for 
which  reason,  all  those  arts  which  tend  to  form  the  body  are  called 
mean,  and  all  those  employments  which  are  exercised  for  gain,  for 
they  take  off  from  the  leisure  of  the  mind,  and  render  it  sordid. 
There  are,  also,  some  liberal  arts  which  are  not  improper  for  free- 
men to  apply  to  in  a  certain  degree  ;  but  all  sedulous  endeavor  to 
acquire  a  perfect  skill  in  them  is  exposed  to  the  faults  I  have  just 
mentioned,  for  there  is  a  great  deal  of  difference  in  the  reason  for 
which  any  one  does  or  learns  any  thing :  for  it  is  not  illiberal  to 
engage  in  it  for  the  sake  of  one's  self,  or  one's  friend,  or  in  the 
cause  of  virtue  ;  while,  at  the  same  time,  to  do  it  for  the  sake  of  an- 
other may  seem  to  be  acting  the  part  of  a  servant  and  slave."  ^ 

With  such  teachers  as  Plato  and  Aristotle,  so  wanting  in 
all  sense  of  the  rights  of  humanity,  and  so  ignorant  of  all  the 

1  Aristotle's  Politics,  Book  vii.  Chap.  ix. 


142  HISTOEY   OF  MONETARY  THEORIES. 

methods  and  conditions  of  human  progress  and  of  scientific 
inquiry ;  the  highest  virtues  of  whose  civilizations  are  the 
worst  vices  of  the  new ;  whose  propositions  were  fancies,  and 
whose  conclusions  fables,  —  was  it  strange  that,  when  they  came 
to  be  authorities  in  the  Church  as  well  as  in  the  Schools,  a 
night  of  intense  darkness  settled  over  Europe,  —  a  darkness 
which  could  never  have  been  dispelled,  but  for  the  new 
races  in  whom  a  sense  of  duty,  and  the  worth  of  man  apart 
from  his  relations  to  the  State,  were  most  potent  springs  of 
action,  and  but  for  whom  the  picture  presented  by  Western 
Asia  might  have  been  that  presented  to-day  by  those  por- 
tions of  Europe  still  occupied  by  what  are  termed  the  Latin 
Races  ? 

The  existence  of  independent  commercial  communities  in 
constant  intercourse,  having  similar  objects  and  pursuits,  and 
acting  and  reacting  upon  each  other,  laid  the  foundation,  not 
only  of  the  laws  of  nations,  but  of  those  economic  and  politi- 
cal systems  which  so  strikingly  distinguish  modern  from  an- 
cient society.  Their  passion  for  luxury  and  wealth  could  only 
be  gratified  by  the  possession  of  the  precious  metals,  of  which 
their  own  countries  furnished  but  a  scanty  supply.  These  are  the 
only  materials  out  of  which  races  unskilled  in  the  mechanic 
arts  can  easily  create  articles  of  beauty  and  ornament,  and 
which  can  be  transported  to  the  most  distant  points  at  small 
cost  compared  with  their  value.  From  the  want  of  highways 
into  the  interior,  the  most  important  productions  of  Northern 
and  Western  Europe  had  a  commercial  value  only  along  the 
navigable  water-lines.  Their  wealth,  therefore,  necessarily 
came  to  be  largely  measured  by  the  amount  of  gold  and  silver 
they  possessed ;  and,  in  accordance  with  the  spirit  of  the  age,  in 
which,  from  the  teachings  of  the  Church  —  whicli  had  assumed 
nothing  less  than  entire  authority  in  affairs,  human  as  well  as 
divine  —  the  protective  sentiment  or  idea  was  carried  into,  and 
sought  to  be  enforced  in  every  walk  and  department  of  life. 
It  was  regarded  as  a  proper  function  of  government  to  re- 
enforce  by  legal  enactments  individual  enterprises  in  bringing 
the  precious  metals  into,  and  retaining  them  within  the  coun- 
try. The  error  consisted,  not  in  an  undue  importance  attached 
to  the  precious  metals,  and  the  desirableness  of  their  posses- 
sion, but  in  the  methods  by  which  it  was  sought  to  secure 
them.     The  nations  had  not  then,  if  they  have  yet,  learned 


ADAM   SMITH.  143 

that  production  must  be  in  ratio  to  the  freedom  enjoyed  by 
their  people,  —  intellectual,  political,  and  religious  ;  and  that, 
as  all  balances  in  trade  are  always  payable  in  coin,  the  people 
producing  the  greatest  amount  of  merchandise  will  always 
have,  relatively,  the  greatest  amount  of  the  precious  metals ;  and 
that,  consequently,  the  wisest  policy  is  to  leave  their  articula- 
tions perfectly  free.  The  amount  of  the  precious  metals  of 
a  nation  is  not  to  be  measured  by  that  which  it  actually  has  in 
hand,  but  by  the  quantity  of  them  to  which  it  has  the  right  of 
possession.  A  capitalist  may  not  have  a  dollar  in  hand  who 
has  millions  loaned  and  payable  in  coin,  at  call.  At  the 
time  when  what  is  called  the  Mercantile  System  was  in  full 
vigor,  usury  was  forbidden  by  law  as  well  as  by  the  teachings 
of  religion.  Had  it  been  allowed,  the  political  and  religious 
disturbances  which  almost  universally  prevailed  would  have 
rendered  it  wholly  unsafe  for  one  people  to  have  intrusted 
large  amounts  of  capital  to  the  safekeeping  of  another,  and, 
perhaps,  far  distant  one.  At  that  time,  usury,  which  now 
plays  such  a  transcendent  part  in  human  affairs,  was  practised 
only  by  Jews  and  Lombards,  and  was  often,  itself,  a  fruitful 
cause  of  social  disturbance. ^ 

1  The  subject  of  usury  is  well  fitted  to  form  one  of  the  most  interesting 
chapters  in  the  history  of  mankind.  Upon  none  has  there  been  a  wider  difference 
of  opinion ;  of  none  has  the  importance  been  so  little  appreciated  and  under- 
stood ;  none  has  been  a  more  fruitful  source  of  political  and  social  disquiet ;  and 
none  has  presented  to  legislators  more  difficult  problems  for  solution. 

The  earliest  historical  reference  to  the  subject  is  to  be  found  in  the  Mosaic 
law  :  "  If  thou  lend  money  to  any  of  my  people  that  is  poor  by  thee,  thou  shalt 
not  be  to  him  as  an  usurer,  neither  shalt  thou  lay  upon  him  usury." — Exodus 
xxii.  25.  "  Thou  shalt  not  lend  upon  usury  to  thy  brother ;  usury  of  money, 
usury  of  victuals,  usury  of  any  thing  that  is  lent  upon  usury :  unto  a  stranger 
thou  mayest  lend  upon  usury  ;  but  unto  thy  brother  thou  shalt  not  lend  upon  usury, 
that  the  Lord  thy  God  may  bless  tiiee."  —  Deuteronomy  xxiii.  19,  20.  These 
extracts  recognize  the  abstract  lawfulness  of  usury.  Aristotle  forbade  it  as 
against  nature,  that  is,  against  the  dignity  of  citizenship.  As  the  Greeks, 
however,  were  inclined  to  nautical  adventure  and  to  commerce,  the  use  of  money 
in  their  operations  was  indispensable  ;  and,  as  the  teachings  of  their  philosophers 
carried  very  little  moral  obligation,  usury  was  an  almost  universal  practice 
among  them,  nor  do  there  seem  to  have  been  any  legal  enactments  against  it. 
From  the  frequency  of  civil  and  political  commotions,  the  rates  charged  were 
necessarily  high.  With  the  Romans,  usury  was  practised  from  the  foundation 
of  the  city.  By  the  Twelve  Tables,  which  probably  did  little  more  than  embody 
the  customary  law,  the  rate  for  the  use  of  money  was  fixed  at  twelve  per  cent. 
The  penalty  imposed  for  exacting  a  greater  rate  was  the  forfeiture  of  three 
times  the  amount  usuriously  taken.  Such  rate,  for  a  new  people,  was  not  exces- 
sive, and  would  undoubtedly  have  given  no  sufficient  ground  of  complaint  but 


144  HISTOEY   OF    MONETARY  THEORIES. 

The  principles  of  the  Mercantile  System,  as  set  out  by- 
Smith,  were  as  follows  : — 

"  Two  principles  being  established,  —  that  wealth  consisted  in 
gold  and  silver ;  and  that  these  metals  were  brought  into  a  country 

for  the  terrible  penalties  which  followed  the-  non-payment  of  the  debt.  "  The 
cruelty,"  says  Gibbon,  "  of  the  Twelve  Tables  against  insolvent  debtors  still 
remains  to  be  told.  After  judicial  proof  or  confession  of  debt,  thirty  days  of 
grace  were  allowed  before  a  Roman  was  delivered  into  the  power  of  his  fellow- 
citizen.  In  this  private  prison,  twelve  ounces  of  rice  was  his  daily  food ;  he 
might  be  bound  with  a  chain  of  fifteen  pounds'  weight,  and  his  misery  was 
thrice  exposed  in  the  market-place  to  soUcit  the  compassion  of  his  friends  and 
countrymen.  At  the  expiration  of  sixty  days,  the  debt  was  discharged  by  the 
loss  of  liberty  or  life ;  the  insolvent  debtor  was  either  put  to  death  or  sold  into 
foreign  slavery  beyond  the  Tiber :  but,  if  several  creditors  were  alike  obstinate 
and  unrelenting,  they  might  legally  dismember  his  body,  and  satiate  their  re- 
venge by  this  horrid  partition."  —  Decline  and  Fall  of  the  Roman  Empire, 
Chap.  xliv. 

Although  the  severity  of  the  Roman  law  in  reference  to  usury  became  in 
time  greatly  mitigated,  usury  under  the  Empire  as  well  as  under  the  Republic 
was  a  standing  grievance,  and  was  one  of  the  most  difficult  problems  that 
engaged  the  attention  of  the  government.  In  the  year  407,  U.  C,  the  rate  was 
lowered  to  five  per  cent.  In  the  year  412,  U.  C,  the  taking  of  interest  at  any 
rate  was  forbidden.  This,  like  all  similar  laws,  wherever  enacted,  was  almost 
wholly  inoperative.  Usury  continued  to  be  practised,  the  rates  charged  being 
regulated  according  to  the  nature  and  risk  of  the  transaction.  Under  the  dic- 
tatorship of  Sulla,  the  rate  was  fixed  at  three  per  cent.  Juhus  Ciesar  attempted 
to  control  it  by  police  regulations.  All  such  attempts,  which  were  utterly  futile, 
only  served  to  show  the  difficult  nature  of  the  subject  with  which  they  dealt. 
They  only  aggravated  the  evils  which  they  sought  to  cure.  In  the  reign  of  the 
Emperor  Tiberius,  the  city  was  tlireatened  with  insurrection  by  those  oppressed 
by  the  exorbitant  rates  which  continued  to  be  charged.  "  Usury,"  says 
Gibbon,  "  the  intolerable  grievance  of  Rome,  was  discouraged  by  the  Twelve 
Tables,  and  abolished  by  the  clamors  of  the  people.  It  was  revived  by  their 
wants  and  idleness  ;  tolerated  by  the  discretion  of  the  praetors ;  and  finally  de- 
termined by  the  Code  of  Justinian.  By  that  code,  persons  of  illustrious  rank 
were  confined  to  the  moderate  rate  of  four  per  cent ;  six  was  pronounced  to  be 
the  ordinary  and  legal  standard  of  interest ;  eight  was  allowed  for  the  con- 
venience of  manufacturers  and  merchants  ;  twelve  was  granted  to  nautical 
insurance,  which  the  wiser  ancients  had  not  attempted  to  define.  But,  except 
in  this  perilous  adventure,  the  practice  of  exorbitant  usury  was  severely  re- 
strained. The  most  simple  interest  was  condemned  by  the  clergy  of  the  East 
and  West ;  but  the  sense  of  mutual  benefit,  which  had  triumphed  over  the 
laws  of  the  Republic,  has  resisted  with  equal  firnmess  the  decrees  of  the  Church, 
and  even  the  prejudices  of  mankind."  —  Decline  and  Fall  of  the  Roman  Empire, 
Chap.  xliv. 

Usury,  among  the  ancients,  does  not  appear  to  have  been  regarded  as  morally 
wrong.  With  the  Hebrews,  it  might  be  practised  with  the  Gentiles.  With 
the  Greek,  it  was  against  nature,  —  that  is,  was  unworthy  of  a  free  citizen.  It 
might  be  practised  by  slaves,  or  by  persons  occupying  an  inferior  political  posi- 
tion, from  whom  the  duties  of  the  citizen  were  not  required.     With  him,  virtue 


I 


ADAM  s:\nTH.  145 

which  had  no  mines,  only  by  the  '  balance  of  trade,'  or  by  export- 
ing to  a  greater  value  than  it  imported,  —  it  necessarily  became  the 
great  object  of  Political  Economy  ^  to  diminish  as  much  as  possible 

was  the  synonyme  of  the  modern  word  "  honor."  Neither  term  raised  or  involved 
moral  distinctions.  Usury  was  detested  by  the  Romans,  chiefly  from  the  cruelties 
to  which  debtors  were  exposed.  It  was,  perhaps,  from  such  a  sentiment  that 
Cato  made  his  famous  reply,  when  asked  what  he  thought  of  the  practice  of  usury. 
No  sooner,  however,  had  the  Empire  been  converted  to  Christianity  than  its 
sinfulness  came  to  be  an  established  dogma.  As  the  Hebrews  were  considered 
as  constituting  one  family,  between  the  members  of  which  usury  was  not  to  be 
tolerated,  so  the  early  Christians  regarded  themselves  in  the  same  light,  and 
applied  to  themselves  the  same  rule ;  and  the  Church,  so  soon  as  it  acquired 
sufficient  power  to  speak  authoritatively,  declared  it  to  be  a  crime  punishable 
by  the  severest  penalties.  Upon  the  revival  of  learning,  the  teachings  of  Aris- 
totle came  in  to  reenforce  most  powerfully  the  Mosaic  injunction  ;  and,  as  for 
ages  the  Church  was  the  paramount  power,  its  teacliings  were  accepted  with 
bhnd  and  unreasoning  submission. 

It  may  seem  remarkable  that  a  principle  or  practice  from  which  the  Church, 
or  the  religious  organizations  at  the  present  day,  derive  so  vast  an  advantage, 
and  upon  which  are  acknowledged  to  rest  the  moral  as  well  as  the  material 
welfare  of  society,  should  at  the  outset  have  encountered  from  them  such  bitter 
hostility.  The  wonder  ceases  when  the  condition  of  the  race  at  the  time  of  its 
conversion  to  Cliristianity,  and  the  nature  of  the  religious  instinct,  is  considered. 
It  was  inevitable  that  the  early  Christians  should  regard  themselves  as  one 
family,  and  apply  to  their  condition  the  Mosaic  rule.  With  such  sentiments, 
the  teachings  of  Aristotle  would  be  eagerly  accepted.  The  unlawfulness  of 
usury  having  become  a  dogma,  it  was  established  for  all  time  :  for  a  dogma  that 
is  proper  for  one  age  must  be  proper  for  all  ages.  It  was  res  judicata.  To 
again  raise  the  question,  would  have  been  to  impugn  the  authority  of  the 
Church,  —  a  presumption  upon  no  account  to  be  tolerated.  While  the  Church  de- 
nounced usury  as  a  deadly  sin,  and  thundered  its  anathemas  against  all  offenders, 
for  the  discovery  of  whose  crimes  torture  might  be  used,  to  whom  the  rites  of 
religion  were  refused  in  their  lifetime,  and  who  were  condemned  to  eternal 
punishment  after  death,  the  natural  instinct  of  man  still  asserted  itself.  None 
but  Churchmen  or  Schoolmen  felt  it  to  be  a  sin  to  receive  compensation  for  the 
loan  of  that  from  which  by  its  use  they  might  derive  an  income ;  nor  could  a 
borrower  see  any  reason  why  he  should  not  pay  a  part  of  the  advantage  which 
a  loan  secured  to  him.  If  other  articles  of  property,  which  might  be  returned, 
were  chargeable  for  their  use,  it  was  naturally  asked  why  a  charge  might  not  be 


1  Smith  has  the  folly  to  assume  that  Political  Economy  existed  as  a  science  as 
early  as  the  fifteenth  or  sixteenth  centuries !  There  was  no  more  notion  of  it 
at  the  time  he  supposed,  than  there  was  of  the  laws  of  gravity.  No  higher  or 
broader  sentiment  was  involved  in  the  efforts  of  a  nation,  three  hundred  years 
ago,  to  bring  in  and  retain  the  precious  metals  within  it,  than  that  now  felt  by  a 
miser  to  get  and  hoard  all  he  can.  Both  act  in  obedience  to  a  common  instinct 
to  accumulate  the  greatest  possible  amount  of  the  highest  form  of  property. 
The  whole  system  about  which  Smith  makes  so  much  ado,  and  the  idea  that 
mediffival  legislation  in  reference  to  the  precious  metals  proceeded  from,  or  rep- 
resented any  thing  like,  a  deliberate  study  or  investigation^of  the  laws  of  money, 
or  of  Political  Economy,  are  sheer  absurdities. 

10 


146  HISTORY  OF   MONETARY    THEORIES. 

the  importations  of  foreign  goods  for  home  consumption,  and  to 
increase,  as  mucli  as  possible,  the  exportation  of  the  produce  of 
domestic  industry.     Its  two  great  engines,  therefore,  for  enriching 

made  for  the  use  of  money  ?  It  was  replied,  that  when  a  horse,  for  example, 
was  borrowed  and  returned,  the  use  of  the  horse  was  an  advantage  distinct  from 
the  horse;  and  for  such  an  advantage  a  charge  might  properly  be  made.  But, 
when  money  was  borrowed  and  used,  the  thing  itself  was  consumed.  It  was  no 
longer  in  the  hands  of  the  borrower,  nor  had  it  any  value  distinct  from  its  use. 
When,  therefore,  the  borrower  returned  a  sum  equal  to  the  loan,  he  had  done  all 
that  was  required  of  him.  To  make  him  pay  for  the  use  of  the  money  borrowed, 
was  to  make  him  pay  for  that  which,  as  far  as  he  was  concerned,  did  not  exist ; 
that  is,  to  make  him  pay  something  which  he  did  not  receive,  or  to  make  him 
pay  twice  for  the  same  thing.  Such  arguments,  liowever  conclusive  with  the 
Churchmen,  were  not  so  readily  appreciated  by  the  people.  The  authority  of 
the  former,  however,  was  sufBcient  to  confine  the  loaning  of  money  to  the  Jews  ; 
to  whom,  as  beyond  the  pale  of  the  Church,  its  reasoning  did  not  apply.  In 
this  way  this  class  was  vested,  as  it  were,  with  the  monopoly  of  money-lending, 
and  became  the  money-changers  and  bankers  of  the  world.  Nothing  can  be  more 
striking  than  their  continuance  and  success  in  a  calling  which  subjected  them  not 
only  to  the  denunciations  of  the  Church,  and  to  the  contempt  and  hatred  of  all 
Christians,  but  to  the  rapacity  and  lawlessness  of  the  feudal  tyrants  of  the 
countries  in  which  they  sojourned.  They  were  outside  the  protection  of  the 
law  ;  and  it  was  a  virtue,  rather  than  a  crime,  to  rob  and  persecute  them.  Yet 
they  still  continued  to  acquire  and  hold  the  greater  part  of  the  money  of  the 
world.  About  the  close  of  the  eleventh  ccnturj-,  however,  upon  the  revival  of 
commerce  in  the  free  cities  of  Italy,  their  inhabitants  became  so  far  emancipated 
from  the  teaclungs  and  rules  of  the  Church  that  usury  was  not  only  tolerated, 
but  held  to  be  an  honorable  calling.  Its  practice  was  one  of  the  causes  of  the 
marvellous  progress  of  those  cities.  Florence  became  wliat  London  is  at  the 
present  time, —  the  monetary  centre  of  tiie  world.  Their  commercial  spirit  spread 
itself  over  the  rest  of  Europe ;  and  lUilian  bankers,  known  as  the  Lombards,  soon 
became  the  rivals  of  the  Jews,  and  were  seated  in  every  great  mart  of  trade. 
It  was  from  them  that  Lombard  Street,  in  which  they  were  chiefly  collected  in 
London,  took  its  name.  As  they  were  Christians,  and  consequently  tolerated, 
they  soon  eclipsed  the  Jews  in  their  peculiar  calling.  The  Church,  however, 
did  not  change  its  attitude,  nor  was  there  any  considerable  amelioration  in  Eng- 
land of  the  laws  against  usury  until  154G,  in  which  its  lawfulness  was  especially 
recognized  by  an  act  of  Parliament.  It  was  not  till  the  Reformation,  which 
emancipated  the  mind  from  the  dogmas  of  the  Church,  that  the  subject  of 
usury  came  to  be  treated  in  a  manner  which  could  lead  to  its  proper  solution. 
It  could  then  be  discussed  upon  its  own  merits.  A  large  number  of  the  leading 
reformers  proclaimed  its  lawfulness  ;  although  to  establish  the  rate  to  be  charged 
was  still  considered  to  be,  as  it  is  to-day  in  many  countries,  a  proper  function  of 
government.  Even  in  the  State  of  New  York,  the  taking  of  more  than  seven 
per  cent  is  punished  by  very  severe  penalties. 

No  proposition  seems  better  established  at  the  present  time  than  that  the  charge 
for  the  use  of  money  should,  like  that  for  all  other  kinds  of  property,  be  regulated 
by  the  demand  ;  that  the  price  of  a  horse,  in  the  form  of  money,  should  be  just 
as  valuable  to  the  holder  as  the  horse.  That  so  simple  a  truth  should  require 
ages  to  gain  admittance  into  the  mind  or  conviction  of  mankind  must  be  almost 
wholly  due  to  its  teachers,  and,  in  modern  times,  to  Churchmen  and  Schoolmen. 
These  classes  have  been  the  most  formidable  obstacles  to  the  progress  of  society. 


ADAM   SIVHTH.  147 

the  conntry  were  restraints  upon  importation,  and  the  enconrnge- 
ment  of  exportation. 

"  1st.  The  restraints  upon  importation  of  such  foreign  goods 
for  home  consumption  as  could  be  produced  at  home,  from  what- 
ever country  they  could  be  imported. 

"  2d.  Restraints  upon  the  importation  of  goods  of  almost  all 
kinds,  from  those  particular  countries  "svith  which  the  balance  of 
trade  was  supposed  to  be  disadvantageous. 

"  Exportations  were  encouraged,  sometimes  by  drawbacks,  some- 
times by  bounties,  sometimes  by  advantageous  treaties  of  commerce, 
and  sometimes  by  the  establishment  of  colonies  in  distant  coun- 
tries. .  .  . 

''  The  two  sorts  of  restraints  upon  importations  above  mentioned, 
together  with  these  four  encouragements  to  exportation,  constitute 
the  six  principal  means  by  which  the  commercial  system  proposes 
to  increase  the  quantity  of  gold  and  silver  in  any  country,  by  turn- 
ing the  '  balance  of  trade '  in  its  favor."  ^ 

Smith  has  properly  stated  the  theory  upon  which  the  so- 
called  Mercantile  System  was  based,  —  that  the  precious  metals 
can  be  brought  into  a  country  not  producing  them,  only  by 
exporting  a  greater  value  of  merchandise  than  is  imported,  — 
the  balance  being  payable  in  coin.  Hence  the  attempts  by 
legislation  to  increase  such  balance.  He  opposed  it  on  two 
grounds :  first,  the  inadequacy  of  the  object ;  secondly,  the 
inadequacy  of  the  means  to  the  object.  The  means  were 
absurd,  for  the  reason  that  the  ends  were  equally  so  ;  for  why 
should  the  least  valuable  articles  of  commerce  be  the  great 
object  of  commerce  ? 

"  That  wealth,"  to  give  his  own  words,  "  consists  in  money,  or  in 
gold  and  silver,  is  a  popular  notion  which  naturally  arises  from  the 
double  function  of  money,  as  the  instrument  of  commerce  and  as 

Man  has  risen  in  the  scale  just  in  ratio  as  their  power  and  influence  have  de- 
clined. As  there  is  no  motive  so  strong  as  that  which  leads  to  the  acquisition  of 
property,  so  no  motive  or  incitement,  on  the  whole,  can  be  more  beneficent  in 
its  results.  Capital  is  always  a  great  moral  agency  in  society.  Some  one  always 
stands  ready  to  take  every  dollar  that  is  produced,  in  the  hope  that  by  uniting  it 
with  his  own  labor  he  can  greatly  benefit  his  condition,  and  still  return  a  fair 
compensation  for  its  use.  But  for  such  capital,  he  might  be  compelled  to  remain 
in  indolence,  a  prey  to  all  its  evils.  As  he  acquires  strength,  he  accumulates  for 
the  purpose  of  lending  to  others.  Every  dollar  he  gains  becomes  a  co-worker 
with  him.  His  labor  not  only  raises  him  above  want,  but  is  the  condition  of  his 
highest  moral  training,  and,  by  the  capital  it  acquires,  is  the  foundation  of  those 
institutions  wliich  in  the  highest  degree  alleviate  the  sufferings,  and  promote  the 
advancement  and  welfare,  of  the  race. 
1  Wealth  of  Nations,  Book  ii.  Chap.  i. 


148  HISTORY  OF  MONETARY  THEORIES. 

the  measure  of  value.  In  consequence  of  its  being  the  instrument 
of  commerce,  when  we  have  money  we  can  more  readily  obtain 
whatever  else  we  have  occasion  for  than  by  means  of  any  other 
commodity.  The  great  affair,  we  always  find,  is  to  get  money. 
When  that  is  obtained,  there  is  no  difficulty  in  making  any  subse- 
quent purchase.  In  consequence  of  its  being  the  measure  of  value, 
we  estimate  that  of  all  other  commodities  by  the  quantity  of  money 
which  they  will  exchange  for.  We  say  of  a  rich  man,  that  he  is 
worth  a  great  deal,  and  of  a  poor  man,  that  he  is  worth  very  little, 
money.  A  frugal  man,  or  a  man  eager  to  be  rich,  is  said  to  love 
money  ;  and  a  careless,  a  generous,  or  a  profuse  man  is  said  to  be 
indifferent  about  it.  To  grow  rich  is  to  get  money ;  and  wealth 
and  money,  in  short,  are  in  common  language  considered  as  in 
every  respect  synonymous. 

"  A  rich  country,  in  the  same  manner  as  a  rich  man,  is  supposed 
to  be  a  country  abounding  in  money ;  and  to  heap  up  gold  and 
silver  in  any  country  is  supposed  to  be  the  readiest  way  to  enrich 
it.  For  some  time  after  the  discovery  of  America,  the  first  inquiry 
of  the  Spaniards,  when  they  arrived  upon  any  unknown  coast,  used  to 
be,  if  there  was  any  gold  or  silver  to  be  found  in  the  neighborhood. 
By  the  information  which  they  received,  they  judged  whether  it 
was  worth  while  to  make  a  settlement  there,  or  if  the  country  was 
worth  the  conquering.  Piano  Carpino,  a  monk,  sent  ambassador 
from  the  King  of  France  to  one  of  the  sons  of  the  famous 
Genghis  Khan,  says  that  the  Tartars  used  frequently  to  ask  him  if 
there  was  plenty  of  sheep  and  oxen  in  the  kingdom  of  France. 
Their  inquiry  had  the  same  object  with  that  of  the  Spaniards. 
They  wanted  to  know  if  the  country  was  rich  enough  to  be  worth 
the  conquering.  Among  the  Tartars,  as  among  all  other  nations  of 
shepherds,  who  are  generally  ignorant  of  the  use  of  money,  cattle 
are  the  instruments  of  commerce  and  the  measures  of  value. 
Wealth,  therefore,  according  to  them,  consisted  in  cattle,  as,  ac- 
cording to  the  Spaniards,  it  consisted  in  gold  and  silver.  Of  the 
two,  the  Tartar  notion,  perhaps,  Avas  the  nearest  to  the  truth.  .  .  . 

"  It  is  not  because  wealth  consists  more  essentially  in  money  than 
in  goods,  that  the  merchant  finds  it  generally  more  easy  to  buy 
goods  with  money  than  money  with  goods  ;  but  because  money  is 
the  known  and  established  instrument  of  commerce,  for  which 
every  thing  is  given  in  exchange,  but  which  is  not  always  with  equal 
readiness  to  be  got  in  exchange  for  every  thing.  The  gi-eater  part 
of  goods,  besides,  are  more  perishable  than  money,  and  he  may  fre- 
quently sustain  a  much  greater  loss  by  keeping  them.  When  his 
goods  are  upon  hand,  too,  he  is  more  liable  to  such  demands  for 
money  as  he  may  not  be  able  to  answer,  than  when  he  has  got  their 
price  in  his  coffers.  Over  and  above  all  this,  his  profit  arises  more 
directly  from  selling  than  from  buying ;  and  he  is,  upon  all  these 
accounts,  generally  much  more  anxious  to  exchange  his  goods  for 
money  than  his  money  for  goods.  But  though  a  particular  mer- 
chant, with  abundance  of  goods  in  bis  warehouse,  may  sometimes 
be  ruined  by  not  being  able  to  sell  them  in  time,  a  nation  or  coun- 
try is  not  liable  to  the  same  accident.     The  whole  capital  of  a  mer- 


ADAM   SMITH.  149 

chant  frequently  consists  in  perishable  goods  destined  for  piirchasino- 
money.  But  it  is  but  a  very  small  part  of  the  annual  produce  of 
the  land  and  labor  of  a  country  which  can  ever  be  destined  for 
purchasing  gold  and  silver  from  their  neighbors.  The  far  greater 
part  is  circulated  and  consumed,  among  themselves ;  and,  even  of  the 
surplus  which  is  sent  abroad,  the  greater  part  is  generally  destined 
for  the  purchase  of  other  foreign  goods.  Though  gold  and  silver, 
therefore,  could  not  be  had  in  exchange  for  the  goods  destined  to 
purchase  them,  the  nation  might  not  be  ruined.  It  might,  indeed, 
suffer  some  loss  and  inconvenience,  and  be  forced  upon  some  of 
those  expedients  which  are  necessary  for  supplying  the  place  of 
money.  The  annual  produce  of  its  land  and  labor,  however,  would 
be  the  same,  or  very  n.early  the  same,  as  usual ;  because  the  same, 
or  very  nearly  the  same,  consumable  capital  would  be  employed  in 
maintaining  it.  And  though  goods  do  not  always  draw  money  as 
readily  as  money  draws  goods,  in  the  long  run  they  draw  it  more 
necessarily  than  even  it  draws  them.  Goods  can  serve  many  other 
purposes  besides  purchasing  money ;  but  money  can  serve  no  other 
purpose  besides  purchasing  goods.  Money,  therefore,  necessarily 
runs  after  goods ;  but  goods  do  not  always  or  necessarily  run  after 
money.  The  man  who  buys  does  not  always  mean  to  sell  again, 
but  frequently  to  use  or  to  consume ;  whereas,  he  who  sells  always 
means  to  buy  again.  The  one  may  frequently  have  done  the  whole, 
but  the  other  can  never  have  done  more  than  the  one-half  of  his 
business.  It  is  not  for  its  own  sake  that  men  desire  money,  but 
for  the  sake  of  what  they  can  purchase  with  it."  ^ 

The  distinction  that  Smith  made  between  money  as  an  in- 
strument of  commerce,  and  as  a  measure  of  value,  is  wholly 
fanciful.  Money  is  an  instrument  of  commerce  for  the  reason 
that  it  is  a  measure  of  value  ;  and  a  measure  of  value  for  the 
reason  that  it  is  an  instrument  of  commerce.  The  instrument 
and  the  measure  are  always  identical.  They  can  never  be  sepa- 
rated. A  person  sells  a  barrel  of  flour  for  ten  dollars  in  gold, 
for  the  reason  that  the  gold  has  the  same  value  with  the  flour. 
Equivalents  are  exchanged.  Five  dollars  in  gold  would  not 
be  accepted  for  the  flour,  for  the  very  good  reason  that  they 
are  not  worth  as  much.  The  instrument  and  the  measure 
pass  from  buyer  to  seller  at  the  same  moment  and  by  the  same 
act,  and  vice  versa  ;  for  the  flour  is  the  instrument  of  commerce 
which  measures  the  value  of  the  gold,  just  as  much  as  the  gold 
is  the  instrument  of  commerce  which  measures  the  value  of 
the  flour.  The  measure  is  never  separated  from  the  value,  as 
in  the  case  of  the  yardstick,  which  never  passes  with  the 
goods  it  measures.     Smith's  double  function  of  money,  there- 

1  Wealth  of  Nations,  Book  iii.  Chap.  i. 


150  HISTORY   OF  MOXETAEY  THEOKIES. 

fore,  whicli  lie  took  without  credit  from  Law,  is  a  pure  fic- 
tion, —  a  fiction,  unfortunately,  which  has  done  a  vast  amount 
of  mischief ;  for  it  is  one  which  has  been  accepted  as  a  funda- 
mental principle  in  monetary  science  from  his  day  to  our  own, 
and  is  the  great  cause  of  the  confusion  and  error  which  still 

prevail. 

As  a  person  is  rich  in  proportion  to  the  amount  of  coin  —  the 
highest  form  of  property  —  which  he  holds,  so  a  person  is  rich 
in  proportion  to  the  number  of  oxen  and'  horses  he  owns. 
Money  is  not  every  thing,  no  more  than  oxen  and  horses.  The 
Spaniards  were  right,  as  their  only  object  was  wealth,  in  mak- 
ino-  o-old  and  silver  in  South  America  and  Mexico  their  chief 
object,  in  place  of  the  other  products  of  these  countries.  They 
grew  rich  much  faster  by  wringing  these  articles  out  of  the 
natives,  than  they  could  by  any  other  mode.  The  amount  of 
gold  and  silver  they  collected  was  something  the  like  of  wliich 
was  never  seen.  They  enriched  themselves  beyond  measure. 
There  is,  however,  another  side  to  this  picture.  The  adventurers 
were  a  set  of  robbers  and  cut-throats,  and  in  the  end  shared 
the  fate  of  robbers  and  cut-thi-oats.  Like  all  of  their  class, 
they  were  speedily  rid  of  their  ill-gotten  gains  ;  and  both  Spain 
and  her  colonies  have  ever  since  been  pa}ing  the  penalties  of 
their  follies  and  crimes  in  impoverishment,  a  prey  to  intestine 
feuds,  without  ambition,  without  capacity  or  hope,  — a  by-word 
and  reproach  among  the  nations.  The  Tartars  inquired,  and 
very  properly,  of  an  ambassador  sent  by  the  King  of  France, 
whether  there  were  many  sheep  or  oxen  in  that  country,  as  a 
means  of  informing  themselves  of  the  degree  of  its  wealth, 
their  wealth  consisting  chiefly  in  their  herds.  This  does  not 
prove  them  to  be  a  higher  form  of  capital  ;  only  that,  from  their 
want  of  exchangeable  commodities,  it  was  the  only  kind  of 
capital  they  could  acquire  in  any  considerable  amount.  These 
could  not  be  sent  to  Peru  and  Mexico  in  exchange  for  gold. 
In  the  same  sense,  an  Esquimaux  would  ask  a  West  Indian 
whether  there  were  many  seals  and  walruses  in  his  country. 
By  such  inquiries  by  a  people  ignorant  of,  or  possessing  little 
gold  and  silver,  Smith  would  infer  that  these  articles  did  not 
constitute  wealth.  Indeed,  he  seems  to  think  such  inquiries 
to  be  conclusive  ;  as  he  intimates  that  the  Tartars'  test  of 
wealth  —  sheep  and  oxen — was  a  better  one  than  that  of  the 
Spaniards  —  gold  and  silver. 


ADAM  s:mith.  151 

"  It  is  not,"  says  Smith,  "  because  wealth  consists  more  ex- 
clusively in  money  than  in  goods  that  the  merchant  finds  it 
generally  more  easy  to  buy  goods  with  money  than  to  buy 
moner  with  oroods,  but  because  moner  is  the  known  and  es- 
tabhshed  instrument  of  commerce,  for  which  everv  thine  is 
readily  given  in  exchange,  but  which  is  not  always  with  equal 
readiness  to  be  got  in  exchange  for  every  thing."  "Why  did 
money  become  an  established  instrument  of  commerce  for  which 
everv  thing  is  readilv  criven  in  exchange  ?  Does  not  such 
universal  experience  establish  a  law,  and  could  not  Smith  have 
been  much  better  employed  in  investigating  the  phenomena,  for 
the  purpose  of  deducing  the  law,  than  in  wearying  the  reader 
with  page  after  page  of  loose  and  vague  assumptions,  not  one 
of  which  will  bear  the  test  even  of  ordinary  scrutiny  ?  In  the 
discussion  of  money,  he  failed  to  solve  a  single  proposition. 
He  is  like  a  traveller  who,  lost  in  a  wood  or  fog.  always  speedily 
comes  round  to  the  point  at  which  he  started.  Xo  progress  is 
nade.  —  only  constant  iteration  of  the  same  circle ;  so  that  any 
account  he  micrht  give  of  his  wanderincrs  would  be  but  the  re- 
petition  of  the  same  experiences  and  the  description  of  the 
same  scenes.  So  Smith's  argument  upon  the  nature  and  origin 
of  money:  upon  the  real  and  nominal  price  of  commodities  ; 
upon  metallic  and  paper  money,  and  upon  the  mercantile  sys- 
tem, is  but  a  repetition  that  money  is  an  invention  from  the 
sense  of  its  necessity ;  that  in  its  use  it  is  wholly  unproduc- 
tive ;  that  only  such  an  amount  of  it  can  remain  in  circulation 
as  is  necessary  to  effect  the  exchanges  of  society ;  that  an 
issue  of  paper  money  always  displaces  from  cii'culation  an 
equal  amount  of  coin  ;  and  that  the  only  mode  by  which  the 
latter  can  be  made  productive  is  to  send  it  to  other  countries. 
He  uses,  throughout,  arguments  precisely  similar  to  sustain 
propositions  wholly  different  in  kind. 

Another  fiction  is  his  assertion  that  a  profit  more  frequently 
arises  fi'om  selling  than  from  buying  ;  and  that  the  merchant, 
consequently,  is  much  more  anxious  to  sell  his  goods  for  money 
than  his  monev  for  Q:oods.  The  old  ada^e.  that  goods  well 
bought  are  half  sold,  is  exactly  opposed  to  this  assumption. 
It  is  utter  follv,  however,  to  assume  anv  thine:  of  the  kind. 
The  profit  or  loss  of  a  transaction  cannot  be  told  till  after  the 
goods  that  have  been  purchased  are  sold.  It  hinges  as  much 
upon  one  act  as  upon  the  other.     To  attempt  to  decide  in 


152  HISTORY   OF   MONETAE Y  THEOEIES. 

wliicli  act  is  the  greater  profit  is  on  a  par  with  an  attempt  to 
determine  which  of  two  equal  quantities  is  the  larger. 

Not  content  with  asserting  that  goods  can  be  more  readily 
obtained  for  money  than  money  for  goods,  Smith  proceeds  imme- 
diately to  prove  the  converse  of  this  proposition.  "  Though 
goods,"  he  says,  "  do  not  always  draw  money  so  readily  as 
money  draws  goods,  in  the  long  run  they  draw  it  more  readily 
than  it  draws  them.  Goods  can  serve  many  other  purposes 
beside  purchasing  money ;  but  money  can  serve  no  other  pur- 
pose beside  the  purchase  of  goods.  IMoney,  therefore,  neces- 
sarily runs  after  goods  ;  but  goods  do  not  always,  or  necessarily, 
run  after  money.  The  man  who  buys  does  not  alwa3's  mean 
to  sell  again  ;  whereas  he  who  sells  alwaj^s  means  to  bu}^  again. 
It  is  not  for  its  own  sake  that  men  desire  money ;  but  for  the 
sake  of  what  they  can  purchase  with  it."  As  in  all  transactions 
for  the  sale  of  merchandise  equivalents  are  exchanged,  or  are 
assumed  to  be  exchanged,  and  as  each  party  equally  assents 
thereto,  it  is  difficult  to  see  that  the  running  which  he  describes 
is  more  on  one  side  than  the  other.  The  illustration  is  simply 
an  attempt  to  prove  that  of  two  equally  strong  motives,  oi 
inclinations,  one  is  stronger  than  the  other ;  or  that  the  tide 
flows  inland  with  more  strength  than  it  flows  outward.  His 
assertion,  that  goods  can  serve  many  other  purposes  than  the 
purpose  of  money,  while  money  can  serve  no  other  purpose 
than  the  purchase  of  goods,  shows  that  he  had  not  the  least 
comprehension  of  the  matter  upon  which  he  wrote.  The  ex- 
change of  money  for  goods,  or  goods  for  money,  is  simply  an 
exchange  of  one  kind  of  merchandise  for  another.  To  assert 
that  one  of  the  subjects  of  exchange  can  have  no  use  but  to 
serve  as  the  instrument  of  exchange,  is  equivalent  to  asserting 
that  it  has  no  value  in  itself,  or  that  it  is,  like  a  yardstick,  the 
mere  instrument  of  exchange.  It  is  the  old  story  which  Smith 
is  always  repeating  under  all  possible  forms,  that  money  is  not 
merchandise,  and  that  value  is  no  necessary  attribute  of  it. 
The  exact  opposite  to  his  assertion  is  the  truth.  Money  — 
gold  and  silver  —  serves  vastly  wider  uses  than  any  other 
kind  of  merchandise.  Food  can  have  no  other  purpose  than  to 
be  eaten ;  cloth,  no  other  than  for  making  garments.  The 
precious  metals,  on  the  other  hand,  enter  into  almost  every  de- 
partment of  social  economy.  It  is  the  variety  of  their  uses 
wliich  renders  their  value  more  uniform  than  that  of  any  other 


ADAM   SmTH.  153 

articles.  They  are  the  only  articles  which  can  serve  as  re- 
serves. It  is  these,  with  other  qualities  which  they  possess, 
that  fit  them  to  serve  as  money.  No  other  articles  of  property 
have  such  a  wide  range  of  use.  Smith  and  the  Economists  have 
adopted  exactly  the  opposite  theory,  —  that  the  precious  metals, 
of  all  articles,  had  the  narrowest  range  of  use  ;  that  their  pos- 
session was. to  be  avoided,  was  to  be  discoiu-aged  rather  than 
encoui-aged,  and  that  the  only  way  to  turn  them  to  account 
was  to  send  them  abroad  in  exchange  for  what  was  useful. 
In  reply  to  his  assertion,  that  it  is  not  for  its  own  sake  that  men 
desire  money,  it  may  be  replied  that  it  is  for  its  own  sake  that 
they  do  desire  it ;  as  by  means  of  its  intrinsic  value  they  can 
always  obtain  that  of  which  they  stand  in  need.  It  frequently 
happens  when  money  is  acquired  its  possessor  has  no  notion  of 
the  objects  for  which  he  may  expend  it ;  or  he  may  intend  never 
to  expend  it,  but  to  invest  it  for  the  income  it  will  yield. 
A  man  labors  for  money  just  as  diligently  when  he  has  a  hun- 
dred times  more  than  he  knows  how  to  spend,  as  he  does  when 
he  is  pinched  with  hunger. 
\^  Money,  Smith  tells  us,  is  the  least  valuable  part  of  the  capital 
of  a  community.  In  the  same  breath,  almost,  he  tells  us  that 
the  great  thing  is  to  get  money.  That  got,  everj^  thing  else 
follows.  If  money  be  the  master  of  every  thing  else,  and  if 
it  secure  b}'  direct  exchange  whatever  its  possessor  may  wish 
to  purchase,  how  is  it  that  it  is  the  least  valuable  and  least 
productive  part  of  a  person's  capital  ?  What  constitutes  value 
but  demand  and  uses  ? 

"  Although,"  says  Smith,  "  gold  and  silver  could  not  be 
had "  [to  serve  as  mone}^]  "  in  exchange  for  goods  destined 
to  purchase  them,  the  nation  would  not  be  ruined.  It  might, 
indeed,  suffer  some  loss  and  inconveniency,  and  be  forced 
upon  some  of  those  expedients  which  are  necessary  for  sup- 
plying the  place  of  money.  The  annual  produce  of  its  land 
and  labor,  however,  would  be  the  same,  or  very  nearly  the 
same,  as  usual ;  because  the  same,  or  very  nearly  the  same, 
consumable  capital  would  be  employed  in  maintaining  it." 
What  expedients  would  he  use?  Not  legal  tender  surely? 
That  he  never  contemplated.  He  could  not  have  a  symbolic 
currency  without  reserves  of  coin.  The  nation,  consequently, 
would  be  without  any  currency  whatever.  Its  industries,  not- 
withstanding, were  to  go  on  as  before.     Some  inconvenience, 


154  HISTOKY   OF  MONETAE Y  THEOEIES. 

but  no  considerable  loss,  would  result.  It  has  been  shown 
that  life  without  money  is  the  life  of  the  savage.  To  give  it 
up  is,  at  the  same  moment,  to  give  up  our  cvilization.  Smith 
would  have  all  our  present  conditions  maintained,  throwing 
away  the  very  foundation  upon  which  they  rest.  Such  were 
his  ignorance  and  incapacity  that  he  could  hardly  venture 
upon'^an  assertion  that  did  not  involve  him  in  the  grossest  con- 
tradictions and  absurdities. 

The  reason  why  the  dogmas  of  Aristotle  and  Smith  have 
had  such  universal  acceptance  is  the  absence  of  all  attempt  at 
proof  in  their  support.  They  are  pure  assumptions.  Had  it 
been  attempted  to  establish  them  by  any  process  of  reasoning, 
the  utter  inadequacy  of  the  evidence  would  have  been  fatal  to 
the  attempt.  To  offer  a  reason  is  always  a  dangerous  expedi- 
ent. If  one  would  command  assent,  his  words  must  be  those 
of  an  oracle.  He  must  transcend  the  vulgar  processes  of  rea- 
son and  induction,  of  proof.  The  public  do  not  want  to  be 
told  how  a  thing  is  true,  but  that  it  is  true.  A  mere  charla- 
tan, consequently,  will  often  for  a  time  find  wider  acceptance 
than  a  man  of  the  most  solid  qualities.  An  affirmation  with- 
out a  reason  may  be  above  the  reach  of  reason.  How  is  it  to 
be  demonstrated  that  Aristotle's  fifth  element  or  essence  does 
not  exist  ?  —  how  that  all  diseases  do  not  operate  through  the 
fluids  rather  than  through  the  solids  ?  All  that  is  wanting, 
often,  to  the  perpetuation  of  a  theory  or  error,  no  matter  how 
gross,  is  its  mere  statement.  The  moment  assent  is  secured, 
it  may  defy  for  ages  all  assault ;  for  the  reason  that  the  meth- 
ods likely  to  be  brought  to  its  attack  have  no  adaptation  to 
their  object. 

The  doctrines  of  the  Economists  in  reference  to  "  Balance 
of  Trade  "  are  the  necessary  sequence  of  those  held  by  them 
in  reference  to  money.  What  could  be  more  absurd  than  to 
make  that  the  object  of  commerce  which  was  the  least  valu- 
able subject  of  commerce,  or  which  was  not  even  a  subject  of 
commerce  ?  The  premises  admitted,  the  conclusions  were 
inevitable.  With  them,  the  suggestion  of  the  importance  of 
a  favorable  balance  of  trade  was  the  red  rag  to  the  bull :  it 
was  enough  to  throw  them  into  paroxysms  of  rage  and  fury. 
The  welfare  of  a  nation  was  to  be  measured  by  the  amount  of 
the  precious  metals  it  could  get  rid  of.     In  parting  with  them, 


ADAJVI  SIVHTH.  155 

it  parted  with  that  which  was  comparatively  valueless  for  that 
which  might  be  highly  valuable.  Better  to  part  with  them 
for  silks  and  wines  than  to  keep  them ;  as  some  use  and  satis- 
faction, at  least,  could  be  got  out  of  the  former,  while  little 
or  nothing  could  be  got  out  of  the  latter.  If,  on  the  other 
hand,  gold  and  silver  be  the  highest,  instead  of  the  lowest, 
form  of  capital,  then  the  great&r  the  amount  accumulated  the 
richer  the  nation  becomes.  As  they  are  capital,  a  favorable 
balance  payable  in  them  is  that  for  which  every  individual 
and  nation  has  always  been  and  is  constantly  striving.  The 
amount  of  such  balances  measures  the  degree  of  their  acquisi- 
tion or  wealth.  It  is  not  necessary  that  the  balances  arising 
should  be  immediately  paid  over,  or  paid  over  at  all,  in  coin. 
If  the  immediate  payment  of  such  balances  be  forborne,  the 
party  in  whose  favor  they  are  found  is  compensated  by  receiv- 
ing interest  on  the  amount.  Such  interest  or  income  makes 
a  part  of  his  wealth.  Even  Huskisson,  one  of  the  most  intel- 
ligent of  Englishmen,  and  hardly  to  be  named  in  connection 
with  the  Economists,  fell  into  their  common  error.  In  his 
essay  in  vindication  of  the  Report  of  the  Bullion  Committee, 
of  which  he  was  a  distinguished  member,  he  uses  the  follow- 
ing language :  — 

"Two  very  erroneous  opinions  on  this  subject  are  most  generally 
received  in  the  theory  of  the  mercantile  world  :  — 

"  1st.  That,  whenever  the  exchange  is  against  any  country,  the 
natural  and  general  course  of  balancing  the  account  is  by  a  pay- 
ment in  bullion. 

"  2dly.  That  the  balance  of  these  payments  in  favor  of  any 
country  is  finally  to  be  measured  by  what  is  called  the  balance  of 
trade^  or  the  excess  of  exports  above  imports.  .  .  .  Such  is  affirmed 
to  be  the  present  situation  of  this  country,  and  the  true  explana^ 
tion  of  the  very  depressed  state  of  our  foreign  exchanges. 

"  The  first  of  these  positions  is  so  little  conformable  to  truth,  and 
to  the  real  course  of  business  between  nations,  that  there  is,  per- 
haps, no  one  article  of  general  consumption  and  demand  which 
forms  the  foundation  of  so  few  operations  of  trade  between  the 
different  countries  of  Europe  as  bullion  ;  and  that  the  operations 
which  do  take  place  originate  almost  entirely  in  the  fresh  supplies 
which  are  yearly  poured  in  from  the  mines  of  the  New  World,  and 
are  chiefly  confined  to  the  distribution  of  those  supplies  through 
the  different  parts  of  Europe.  If  this  supply  were  to  cease  alto- 
gether, the  dealings  in  gold  and  silver,  as  objects  of  foreign  trade, 
would  be  very  few,  and  those  of  short  duration."  ^ 

1  Huskisson  on  the  Depreciation  of  the  Currency,  pp.  48-50. 


156  HISTORY   OF   MONETARY  THEORIES. 

Huskisson  could  not  have  written  so  carelessly,  but  for  the 
acceptance  of  dogmas  the  truth  of  which  it  never  occurred  to 
him  to  examine.  He  had  been  told  that  gold  and  silver  were 
not  the  subjects  —  only  the  instruments  —  of  commerce  ;  that 
the  only  way  in  which  a  nation  could  avail  itself  of  their  value 
was  to  export  them.  No  man  knew  better  than  he  "  that,"  to 
repeat  Mm,  "  whenever  the  exchange  is  against  any  country, 
the  natural  and  obvious  course  of  balancing  the  account  is  by 
payment  in  bullion."  No  man  more  often  asserted,  in  general 
terms,  such  fact  or  law.  It  was  the  great  theme  and  conclu- 
sion of  the  Bullion  Report:  yet,  when  he  sat  down  to  write 
upon  it,  he  fell  into  the  grossest  of  errors,  simply  for  the  rea- 
son that,  from  the  want  of  a  little  reflection,  he  adopted  the 
language  and  nomenclature  in  common  use  ;  and,  in  doing  so, 
he  asserted  what  he  must  have  known  to  be  exactly  contrary 
to  the  fact.  From  the  phenomena  —  from  the  sale  of  every 
thing  for  coin  —  it  might  well  be  inferred  that  the  possession 
of  gold  and  silver  was  the  only  object  of  commerce,  instead  of 
being,  as  he  tells  us,  "  the  one  article  of  general  consumption 
and  demand  which  forms  the  foundation  of  the  fewest  oj^era- 
tions  of  trade  between  the  different  countries  of  Europe ; " 
and  that,  "  were  it  not  for  the  supi)ly  constantly  coming  in 
from  the  New  World,  dealings  in  bullion  would  in  great  meas- 
ure cease."  Was  there  ever  an  mstance  of  a  man  of  such  real 
ability  and  originality  so  completely  mastered  by  Bacon's  "idol 
of  the  theatre  "  ?  i 

There  can  be  no  doubt  that  the  welfare  of  each  nation  is 
best  promoted  by  the  distribution  of  the  precious  metals  the 
world  over  in  proper  equilibrium.  Such  equilibrium  tends 
to  a  harmonious  condition  of  production  and  trade  ;  and,  as  all 
civilized  nations  form  one  great  commercial  community,  the 

1  There  are  idols  which  have  crept  into  men's  minds  from  the  various  dogmas 
of  peculiar  systems  of  philosophy,  and  also  from  the  perverted  rules  of  demon- 
stration ;  and  these  we  denominate  idols  of  the  theatre.  For  we  regard  all  the 
systems  of  philosophy  hitherto  received  or  imagined  as  so  many  plays  brought 
out  and  performed,  creating  fictitious  and  theatrical  worlds.  Nor  do  we  speak 
only  of  the  present  systems,  or  of  the  philosophy  and  sects  of  the  ancients  ; 
since  numerous  other  plays  of  a  similar  nature  can  be  still  composed  and  made 
to  agree  with  each  other,  the  causes  of  the  most  opposite  errors  being  generally 
the  same.  Nor,  again,  do  we  allude  merely  to  general  systems,  but  also  to  many 
elements  and  axioms  of  sciences,  which  have  become  inveterate  by  tradition, 
implicit  credence,  and  neglect.  —  Novum  Organum,  Book  i.  44. 


ADA]\r   SMITH.  157 

welfare  of  all  is  measured  by  that  of  each.     Money,  as  such, 
is  an  instrument  in  production  and  distribution,  and  should  be 
supplied  in  proper  measure  to   all.      If  a   balance  residt   in 
favor  of  any  one  nation  to  be  paid  in  coin,  —  if  that  balance,  or 
the  greater  part  of  it,  can  be  employed  more  profitably  by  the 
community  from  which  it  is  due  than  by  the  one  to  which  it 
is  due,  —  it  is  for  the  interest  of  both  that  such  balance  should 
remain  within  the  indebted  community ;  the  proper  compensa- 
tion to  be  paid  for  its  use,  till  a  balance  arises  against  the  com- 
munity which  is  for  the  present  the  creditor.     The  one  indebted 
can  frequently  pay  interest  with  much  less  inconvenience  than 
it  could  immediately  pay  the  principal  sum.     Forbearance  of 
present  payment,  as  a  rule,  can  always  be  had  by  payment  of 
interest  at  some  rate.     In  this  way,  if,  from  accidental  causes, 
such  as  the  failure  of  crops,  any  community  be  unable  to  meet  its 
accruing  obligations  by  exports  of  merchandise,  it  is  not  com- 
pelled to  draw  too  largely  upon  its  reserves  of  coin.     It  is  of 
the  utmost  importance  to  communities  making  use  of  symbolic 
currencies  that  such  reserves  should  not  suddenly  be  cb-awn 
from  them  ;  for  the  reason  that,  if  they  be  draAvn,  such  currency 
must  be  reduced  in  far  greater  ratio.     The  currency  of  Great 
Britain,  as  already  shown,  equals,  say  £550,000,000.     The  re- 
serves held  by  the  Banks  and  bankers  issuing  it  do  not  exceed, 
probably,  seven  per  cent  of  its  amount,  or,  say,  <£ 35,000,000. 
As  the  percentage  of  reserves  to  liabilities  must  be  maintained, 
it  follows  that  if  £10,000,000  of  such  reserves  be  permanently 
drawn,  the  currency  must  be  reduced  by  nearly  £175,000,000. 
Of  course,  new  reserves  would  be  pro^dded  with  all  possible 
speed ;  but  not  before  a  large  contraction  had  been  made,  and 
great  loss  and  suffering  caused.     "  The  state  of  the  trade  "  in 
that  country  is  watched  with  the  utmost  care  and  anxiety  by 
the  only  power  competent  to  deal  with  the  subject,  —  the  Bank 
of  England.     Should  it  appear  that  any  considerable  portion 
of  its  reserves,  in  which  are  included  those  of  the  whole  coun- 
try, are  likely  to  be  drawn,  it  would  meet  the  emergency  by 
an  immediate  advance  in  the  rate  of  interest,  and  in  this  way 
reduce  the  volume  of  the  currency  by  rendering  it  unprofitable 
for  the  public  to  borrow.     What,  therefore,  the  government 
could  by  no  means  do,  the  Bank,  an  imjyerium  in  tmperio,  is 
fully  competent  to  do.     The  former  might  prohibit  the  export 
of  coin ;  but  it  cotdd  add  no  proper  sanctions  to  its  decrees, 


158  HISTORY   OF  MONETARY  THEORIES. 

and  a  law  without  a  sanction  is  no  law.  If  it  were  for  tlie 
advantage  of  a  party  holding  coin  to  export  it,  the  government 
could  not  prevent  its  export.  But  the  Bank  can  always  en- 
force its  legislation  by  an  appropriate  sanction.  From  such 
legislation  there  is  no  appeal.  From  the  penalty  imposed 
there  can  be  no  escape.  The  Board  of  Directors  of  the  Bank 
meets  weekly  to  consider  the  situation,  and  legislate  as  it  may 
require.  It  may  not  directly  attempt  to  import  gold,  assum- 
ing the  action  of  natural  law  will  bring  in  a  quantity  sufficient 
for  its  needs.  It  does  undertake,  and  most  vigilantly,  that 
such  quantity  as  is  necessary  for  the  proper  maintenance  of 
its  industry  and  trade  shall  not  suddenh^  be  taken  from  it. 
The  efficiency  of  its  action,  unsupported  by  a  single  legal 
enactment,  in  matters  where  governments  wielding  the 
power  of  life  and  death  are  wholly  impotent,  is  a  striking 
proof  of  the  wisdom  of  that  policy  by  wliich  individuals,  as 
well  as  nations,  commit  themselves  to  the  guidance  of  natiu'al 
laws  in  reference  to  production  and  trade,  in  preference  to 
those  of  human  contrivance.  It  is  also  a  triumphant  vindica- 
tion of  the  soundness  of  the  doctrine  of  the  "  Balance  of  Trade ; " 
and  proves  that  the  founders  of  the  Mercantile  System  —  if 
such  system  were  ever  deliberately  founded,  which  is  by  no 
means  probable  —  were  wrong,  not  in  assuming  gold  and  silver 
to  be  the  highest  and  most  desirable  form  of  property,  but  only 
in  the  means  by  which  they  sought  to  acquire  their  possession. 

It  is  assumed  by  the  admirers  of  Smith  that  he  proved  the 
policy  of  Free-Trade  to  be  preferable  to  that  of  Protection. 
As  an  abstract  proposition,  it  may  be  preferable,  as  peace  may 
be  preferable  to  war.  But  such  questions  are  to  be  decided  by 
concrete  —  if  the  word  may  be  used  —  rather  than  by  abstract 
reasoning.  It  may  be  that  war  will  be  accepted  by  a  people 
as  far  preferable  to  peace.  They  may  admit  all  the  objections 
that  can  be  urged  against  it,  yet  obey  sentiments  or  principles 
which  transcend  argument  or  reason.  They  may  engage  in  it 
to  avoid  something  worse  than  all  the  calamities  it  can  impose. 
To  such  a  people  there  may  be  things  more  to  be  dreaded  than 
annihilation.  So  the  abstract  argument  in  favor  of  Free-Trade 
carries  no  sense  or  conviction  to  the  Australian  or  Canadian. 
When  it  is  addressed  to  him,  he  replies :  "  That  may  be  a  very 
good  doctrine  for  you  •  in  England,  but  a  very  poor  one  for  me 


ADAM   SMITH.  159 

in  Australia.  You  are  so  strong  there  that  you  will  declare 
war  upon  me  the  moment  jou  see  that  I  am  about  to  engage 
in  any  industry  which  threatens  to  deprive  you  of  your  mar- 
kets ;  and  will  certainly  overthrow  me,  unless  the  community 
in  which  I  live  will,  in  self-defence,  combine  to  keep  you  at  a 
distance.  Protection,  with  us,  is  but  another  word  for  self- 
defence.  It  is  the  only  means  by  which  we  can  secure  a  ma- 
terial, economic,  and,  perhaps,  political  independence.  What 
you  call  Protection  is  with  us  self-sacrifice.  It  is  a  sacrifice 
which  individuals  as  well  as  communities  must  make,  as  a 
necessar}^  condition  of  wealth  and  prosperity.  A  man  just 
entering  upon  life  with  nothing  but  his  hands,  cannot  indulge 
in  the  same  habits,  expenditures,  and  methods  of  business  as 
one  possessed  of  wealth,  experience,  and  the  confidence  of  the 
public,  —  all  of  them  acquired  by  long  years  of  patient  sacri- 
fice and  industry.  The  new  rival  must  go  through  a  similar 
experience  and  training,  before  he  can  engage  in  enterprises  on 
a  similar  scale,  or  indulge  himseK  in  similar  habits  and  expen- 
ditures." The  truth,  therefore,  of  the  doctrine  of  Free-Trade, 
as  a  rule  of  universal  application,  can  never  be  demonstrated 
by  proof  or  argument.  It  results  from  a  condition,  not  from 
a  law.  "What  is  evidence  to  one  party  or  community  is  no 
evidence  to  another.  A  Free-Trader  is  such  from  interest,  not 
from  benevolence  or  principle.  So  with  the  doctrine  of  Pro- 
tection. In  England,  Free-Trade  is  accepted  as  an  elemental 
truth.  In  her  colonies,  Protection  is  accepted  with  equal  con- 
fidence. The  same  man,  with  the  same  reason,  is  a  Free- 
Trader  in  one  country  and  a  Protectionist  in  another.  In 
England,  a  manufacturer  believes  that,  from  the  low  price  of 
labor  and  material,  from  the  high  mechanical  skill  and  great 
abundance  of  capital  at  his  command,  and  from  his  unrivalled 
means  of  distribution,  he  can  supply  goods  at  a  lower  price 
or  cost  than  they  can  be  produced  in  any  other  country  in  the 
world.  He  feels,  therefore,  that  his  success  is  assured,  provided 
his  fabrics,  when  they  reach  the  consumer,  shall  be  charged 
with  no  other  burden  than  cost,  and  that  the  material  he  works 
up  shall  reach  him  charged  with  no  other  burden.  He  believes, 
consequently,  that  Free- Trade  should  be  the  policy  of  man- 
kind. The  same  person  placed  in  the  colonies  would  very 
well  know  that  he  could  not  compete  with  manufacturers  in 
England,  —  of  textiles,  for  example.     He  would  feel,  however, 


160  HISTORY    OF    MONETARY    THEORIES. 

that  tlie  raw  material  of  liis  new  home  should  be  worked  up, 
in  part  at   least,  upon  or  near  the  spot  where  it  was  grown. 
He  would  understand  that  to  undertake  its  manufacture,  ex- 
posed to  the  competition  which  he  would  be  sure  to  encounter 
from  the  mother  country,  would  be  fatal  to  him,  unless  he  were 
protected  by  some  law  or  impost  duty  which  would  give  him 
the  home,  or  a  part  of  the  home,  market.     He  would  gladly 
make  any  personal  sacrifice,  if  this  would  avail.     As  it  would 
not,  he  appeals  to  the  community  in  which  he  lives  to  unite 
with  him  in  making  it,  by  paying  him  higher  rates  for  what  he 
may  produce  than  they  would  be  compelled  to  pay  for  the  im- 
ported article.     He  is  supported  by  the  colonists,  from  a  con- 
viction   that   his    success    will    promote   their  advantage  by 
increasing  the  prices  of  their  products,  by  adding  to  their  num- 
bers and  their  means  of    consumption.     They  might,  to  be 
sure,  believe  that  when  manufactures  became  well  established 
among  them  the  impost  duties  might  be  removed,  —  their  im- 
position being  only  a  temporary  expedient.     The  same  men, 
therefore,  are  Free-Traders  in  one  country  and  Protectionists 
in  another.     To  say  that  either  doctrine  is  absolutely  true  is 
to  beg  the  question  altogether.     There  is  the  same  reason  for 
affirming  each  to  be  true  under  certain  conditions.     To  prove 
the  superiority  of  Free-Trade,  the  home  manufacturer  must 
show  that  it  is  for  the  interest  of  the  colonists  to  allow  him  to 
work  up  their  raw  material,  and  send  back  the  finished  prod- 
uct.    The  Australian  or  the  Canadian  replies  that  his  country 
can  never  come  to  any  thing  so  long  as  its  products  are  restricted 
to  wool  or  wheat.     The  conviction  and  reason  on  one  side  are 
as  strong  as  they  are  m  the  other.     The  Protectionist,  strug- 
gling for  sometliing  better,  and  prepared  to  make  great  sacri- 
fices to  secure  it,  is  certainly  more  fitted  to  enlist  sympathy 
than  the  Free-Trader,  who  stands  ready  to  crush  out  every 
rival  by  means  of  the   experience,   training,   and   capital   he 
has  acquired.     The  age  of  Protection,  therefore,  is  the  heroic 
one,  —  the    age    of   self-sacrifice,  of    achievement  :    that    of 
Free-Trade,  of    realization,  of  enjoyment,  —  in  other  words, 
of  selfishness.     The  one  bears  the  same  relation  to  the  other 
that  the  ardor,  generosity,  and  sympathy  of  youth  bear  to  the 
cold,  calculating  selfishness  of  wealth  and  age. 

It  may  be  urged,  that,  all  things  being  equal,  freedom  of 
trade  would  promote  the  highest  condition  of  the  race.     But 


ADAJNI  SUnTH.  161 

all  things  can  never  be  equal.  One  nation  or  community  will, 
in  some  particulars,  either  from  situation,  natural  resources,  a 
greater  abundance  of  capital,  or  a  better  trained  industry, 
always  excel  others ;  so  that  the  same  disparity  of  conditions 
witnessed  to-day  is  likely  to  prevail  for  all  future  time,  dividing 
the  world,  as  it  is  now,  into  two  great  camps,  each  using  the 
same  arguments  with  those  now  urged.  Wliile  neither  of 
the  two  doctrines  —  Free-Trade  or  Protection  —  can  be  shown 
to  be  of  universal  application,  or  reconciled  the  one  with  the 
other,  the  latter  is  the  more  liable  of  the  two  to  abuse;  asit 
is,  compared  with  Free-Trade,  a  positive  and  active  principle, 
and  as  it  is  supported  by  far  the  greater  number  of  communi- 
ties or  nations.  It  is  often  made  the  pretext  for  the  creation, 
by  government,  of  odious  and  oppressive  monopolies.  When 
excessive,  it  is  liable  to  give  a  most  unhealthy  impulse  to  the 
industries  of  those  adopting  it,  and  become  most  vexatious  by 
raising  prices  of  many  articles  far  beyond  the  reach  of  the 
working  or  laboring  classes.  As  a  rule,  individuals  are  wiser 
as  to  the  industries  they  may  pursue,  and  the  methods  by 
which  these  may  be  conducted,  than  governments.  The  latter, 
consequently,  should  be  very  careful  in  interposing  in  such 
matters.  The  tendency  of  the  age  is  in  striking  contrast  with 
the  protective  spirit,  which,  hardly  a  generation  ago,  prevailed 
among  every  people  in  matters  of  education,  religion,  and  opin- 
ion, as  well  as  in  those  which  related  to  production  and  trade. 
The  sentiment  wliich  inspired  such  interference  was  dictated, 
not  so  much  by  a  desire  to  promote  the  welfare  of  the  people,  as 
to  merge  all  power  in  the  hands  of  government.  Protection 
in  matters  of  trade,  therefore,  is  now  regarded  with  suspicion 
as  an  instrument  of  oppression  and  as  a  relic  of  barbarism. 
This  tendency  favors  the  free  articulation  of  every  individual 
in  what  concerns  his  own  welfare.  It  increases  in  strength 
with  the  progress  of  mankind  in  intelligence  and  morals.  The 
condition  of  the  great  mass  of  humanity  is  almost  infinitely 
superior  to  what  it  was,  even  a  few  generations  ago,  when  art, 
religion,  government,  education,  personal  freedom,  were  monop- 
olies, —  the  result  of  an  exclusively  protective  sj^irit.  As  Free- 
Trade  is  certain  to  have  the  support  of  those  who  have  made 
the  greatest  progress,  it  is  constantly  gaining  strength  at  the 
expense  of  Protection,  in  having  for  its  advocates  those  who 

from  their  wealth  and  intelligence  give  direction  to  the  ideas 

11 


162  HISTORY   OF  MOKETAEY   THEORIES. 

and  sentiments  of  mankind.  The  reason  why  no  progress  is 
made  in  determining  the  relative  value  of  the  two  sj'stems,  is 
because  the  question,  as  treated,  is  an  insoluble  one.  Argu- 
ment leaves  the  question  precisely  in  the  condition  in  which  it 
is  taken  up  ;  and  is  no  more  likely  to  dispose  of  it  than  are  the 
deliberations  of  peace  societies  to  put  an  end  to  war.  No 
argument  can  convert  a  nation  to  the  doctrines  of  Free-Trade 
■whose  condition  does  not,  without  argument,  beget  such  senti- 
ments ;  or  to  the  oj)posite  doctrine,  one  who  does  not  feel  in 
its  condition  the  necessity  of  Protection. 

For  merchants  and  manufacturers  Smith  had  a  contempt  as 
great  as  ever  that  felt  by  Plato  or  Aristotle.  They  were  the 
authors  of  all  the  illiberal  doctrines  in  reference  to  commerce, 
and  of  all  the  restrictions  imposed  upon  it.  From  these  the 
nobility  and  gentry  learned  what  little  they  knew.  This  con- 
tempt may  have  not  a  little  to  do  with  his  ideas  as  to  the  in- 
significance of  money. 

"  The  sneaking  arts  of  underling  tradesmen,"  he  says,  "  are  thus 
erected  into  political  maxims  for  the  conduct  of  a  great  em])ire; 
for  it  is  the  most  underUug  tradesmen  only  who  make  it  a  rule  to 
employ  chiefly  their  own  customers.  A  great  trader  purcliases  his 
goods  always  where  they  are  cheapest  and  best,  without  regard  to 
any  little  interest  of  this  kind. 

"  By  such  maxims  as  these,  however,  nations  have  been  taught 
that  their  interest  consisted  in  beggaring  all  their  neighbors.  Each 
nation  has  been  made  to  look  with  an  inviilious  eye  upon  the  pros- 
perity of  all  the  nations  with  which  it  trades,  and  to  consider  their 
gain  as  its  own  loss.  Commerce,  which  ought  naturally  to  be, 
among  nations  as  among  individuals,  a  bond  of  union  and  friend- 
ship, has  become  the  most  fertile  source  of  discord  and  animosity. 
The  capricious  ambition  of  kings  and  ministers  has  not,  during  the 
present  and  the  preceding  century,  been  more  fatal  to  the  repose  of 
Europe  than  the  impertinent  jealousy  of  merchants  and  manufac- 
turers. The  violence  and  injustice  of  the  rulers  of  mankind  is  an 
ancient  evil,  for  which,  I  am  afraid,  the  nature  of  human  affairs 
can  scarce  admit  of  a  remedy.  But  the  mean  rapacity,  the  monop- 
olizing spirit,  of  merchants  and  manufacturers,  —  who  neither  are 
nor  ought  to  be  the  rulers  of  mankind,  —  though  it  cannot  perhaps 
be  coiTected,  may  very  easily  be  prevented  from  disturbing  the 
tranquillity  of  anybody  but  themselves."  ^ 

The  impotent  spite  which  dictated  this  incoherent  passage 
borders  very  nearly  upon  untruth.     It  was  the  underling,  the        | 


^  Wealth  of  Nations,  Book  iv.  Chap.  iii. 


i 


ADAM  s^nxH.  163 

shopkeeper,  —  the  impersonation,  with  Smith  as  with  Aris- 
totle, of  baseness  and  selfishness,  —  who  directed  and  con- 
trolled the  policy  of  nations,  who  taught  them  that  their 
advantage  was  best  promoted  by  beggaring  all  their  neighbors. 
How  did  these  underlings  get  at  the  ears  of  kings  and  cour- 
tiers, and  instil  into  their  minds  such  pernicious  doctrines? 
In  the  very  same  breath,  he  tells  us  that-  merchants  and  manu- 
facturers neither  are  nor  ought  to  be  the  rulers  of  mankind. 
Whether  its  rulers  or  not,  they  are  the  class  which,  throughout 
the  ages,  has  nurtured  and  sustained  the  spirit  of  freedom, 
without  which  t^iere  could  have  been  neither  material  progress 
nor  moral  life.  Without  these  classes,  a  despotism  must  have 
prevailed  so  universal  and  inexorable  that  the  race  itself  must 
have  become  extinct  or  savage.  A  nation  is  rich,  intelligent, 
and  free  in  ratio  as  it  collects  within  and  appropriates  to  itself, 
not  only  the  products,  but  the  ideas  and  methods,  of  all  other 
lands.  The  story  of  foreign  countries,  of  their  inhabitants, 
their  institutions,  their  wealth,  —  of  their  physical  aspects,  so 
inviting  or  so  terrible,  —  excites  the  imagination,  and  gives  an 
impulse  to  enterprise  and  adventure  that  faces  every  danger, 
and  triumphs  over  every  obstacle.  It  is  the  school  which 
trains  the  individual  to  deeds  of  heroic  daring  and  faith,  and 
wliich  develops  and  perfects  the  highest  faculties  of  his  nature. 
The  story  of  the  Argonautic  Expedition,  whether  fabulous  or 
true,  exerted  a  most  powerful  influence  over  the  pursuits,  the 
ideas,  and  the  imagination  of  the  Greeks,  and  was  one  of 
the  means  which  helped  to  raise  that  people  to  its  high  place 
among  the  nations.  With  the  Northmen,  a  love  of  nautical 
adventure  was  both  the  outgrowth  and  support  of  that  spirit 
of  freedom  which  so  distinguishes  them  from  all  other  races, 
and  modern  from  ancient  society.  By  means  of  it,  the  moral, 
as  the  intellectual  qualities  of  the  race  have  alike  been  nur- 
tured and  strengthened.  To  come  down  to  modern  times, 
who  in  England  first  welcomed  that  great  reformation  in  relig- 
ion which  gave  to  the  nation  a  new  consciousness  and  a  new 
life?  The  commercial  and  industrial  classes.  Who  met  and 
overthrew  the  Great  Armada,  and  saved  their  countrv  from  a 
foreign  yoke  ?  The  merchants  of  England,  with  ships  fitted 
out  and  manned  at  their  own  cost.  Who  preserved  her  liber- 
ties in  the  great  crisis  in  which  those  of  all  other  nations  were 
overthrown,  and  when  the  Stuarts  sought  to  model  her  consti- 


164  HISTORY   OF   MO>'ETAEY   THEOEIES. 

tution  after  the  despotism  of  France?  The  tradesmen  and 
tradesmen's  clerks,  —  the  train-bands  of  London.  Who  con- 
tributed most  to  expel  that  odious  dynasty,  and  restore  to  their 
coimtry  her  liberties  ;  who  have  made  England  another  Eng- 
land ;  and  who,  if  the  enemies  of  progTess  are  to  be  believed, 
have  subverted  her  constitution  by  restoring  to  it  its  original 
spirit  ?  The  merchants  of  London,  the  same  who  founded  the 
Bank  of  England,  which  so  earnestly  and  efficiently  sustained 
the  government  in  preventing  the  return  to  power  of  that  de- 
tested family.  Who,  within  the  memory  of  the  li\-ing,  carried 
through  those  great  reforms  which  gave  to  the  people  cheap 
food,  and  removed  those  social  and  political  distinctions  which 
had  so  long  been  a  disgrace  to  the  nation?  Its  merchants 
and  manufacturers,  so  well  known  as  the  Manchester  School. 
The  tendency  of  agricultural  pursuits,  from  the  iteration  of 
seasons  and  employments,  is  to  so  limit  the  range  and  deaden 
the  faculties  that,  were  there  no  other  pursuits,  the  race,  if  it 
had  ever  risen  by  other  helps,  would  become  a  mere  machine, 
would  lose  all  aspiration  and  capacity  for  progress,  and  relapse 
into  brutal  stolidity.  The  merchant,  on  the  other  hand,  cre- 
ates his  conditions.  With  him,  nothing  is  fixed  :  every  thing 
is  changing.  He  adds  to  and  enlarges  his  ideas  by  constant 
contact  with  all  lands  and  races.  His  ventures  are  stimu- 
lated by  the  possibility  of  gains  far  beyond  those  usually  fall- 
ing to  the  lot  of  the  tiller  of  the  soil.  His  profession  demands 
the  constant  exercise  of  the  highest  qualities  ;  the  combination 
and  execution  of  great  plans ;  a  knowledge  of  the  character, 
wants,  and  means  of  those  with  whom  he  has  to  deal,  and  of 
the  condition  of  trade  and  the  money  markets  throughout  the 
world.  His  field  is  the  world.  He  soon  learns,  instinctively 
as  it  were,  if  he  be  fitted  to  become  a  great  merchant,  that  his 
success  must  be  in  ratio  to  his  probity.  It  is  for  these  reasons 
that  the  merchant  is  necessarily  the  highest  type  of  a  man  of 
affairs.  There  is  no  morality  like  mercantile  morality  ;  for 
nowhere  else  is  morality  so  indispensable  to  success,  or  exer- 
cised on  so  grand  a  scale.  We  do  not  admire  the  force  that 
draws  a  pin  to  the  earth;  but  we  stand  in  awe  of  that  which 
directs  the  motions  of  the  planets,  and  holds  them  within  their 
appropriate  spheres. 

"  That  it  was  the  spirit  of  monopoly,"  says  Smith,  "  which  origi- 
nally both   invented    and    propagated    this    doctrine,   cannot   be 


ADAM  S3IITH.  165 

doubted  ;  and  they  vrho  first  taught  it  were  hy  no  means  such 
fools  as  they  who  believed  it.  In  even*  country,  it  always  is  and 
must  be  the  interest  of  the  arreat  body  of  the  people  to  bur  what- 
ever they  want  of  those  who  sell  it  cheapest.  The  proposition  is 
so  very  manifest  that  it  seems  ridiculous  to  take  any  pains  to  prove 
it ;  nor  could  it  ever  have  been  called  in  question,  had  not  the  in- 
terested sophistry  of  merchants  and  manufacturers  confounded  the 
common  sense  of  mankind.  Their  interest  is,  in  this  respect,  di- 
rectly opposite  to  that  of  the  great  body  of  the  people."  ^ 

"  Such  as  they  were,  however,  those  arguments  [in  favor  of  the 
protective  system]  convinced  the  people  to  whom  they  were  ad- 
dressed. They  were  addressed  by  merchants  to  parliaments  and  to 
the  councils  of  princes,  to  nobles  and  to  country  gentlemen,  by 
those  who  were  supposed  to  understand  trade,  to  those  who  were 
conscious  to  themselves  that  they  knew  nothing:  about  the  matter. 
That  foreign  trade  enriched  the  coimtry,  experience  demonstrated 
to  the  nobles  and  country  gentlemen,  as  well  as  to  the  merchants  ; 
but  how.  or  in  what  manner,  none  of  them  well  knew.  The  mer- 
chants knew  perfectly  in  what  manner  it  enriched  themselves :  it 
was  their  business  to  know  it.  But  to  know  in  what  manner  it  en- 
riched the  country  was  110  part  of  their  business.  The  subject 
never  came  into  their  consideration.  But,  when  they  had  occasion 
to  apply  to  their  country  for  some  change  in  the  laws  relating  to 
foreign  trade,  it  then  became  necessary  to  say  something  about  the 
beneficial  effects  of  foreign  trade,  and  the  manner  in  which  those 
effects  were  obstructed  bv  the  laws  as  thev  then  stood.  To  the 
judges  who  were  to  decide  the  business,  it  appeared  a  most  satis- 
factory account  of  the  matter  when  they  were  told  that  foreign 
trade  brought  money  into  the  country,  but  that  the  laws  in  ques- 
tion hindered  it  from  bringing  so  much  as  it  otherwise  would  do. 
These  arguments,  therefore,  produced  the  wished-for  effect."  - 

Xo  sooner  had  Smith,  come  to  the  discussion  of  a  class  of 
men  whom  he  despised,  than  his  doctrines  of  Free-Trade  were 
throvm  to  the  winds.  Mankind,  he  says  in  effect,  are  divided 
into  two  classes,  knaves  and  fools  ;  merchants  forming  the  first. 
"  Their  interest,"  he  tells  us,  "  is  directly  opposed  to  that  of 
the  great  body  of  the  people."  How  ?  It  is  certainly  for  the 
interest  of  the  great  body  of  the  people  to  buy  whatever  they 
want  of  those  who  sell  the  cheapest.  Such  a  sentiment,  so 
plain,  he  tells  us  could  not  have  been  called  in  question  but 
for  the  sopliistry  of  merchants  and  manufacturers,  who  tell 
the  people  that  they  should  not  buy  where  they  can  buy 
cheapest,  but  where  they  must  buy  dearest.  But  why  should 
not  merchants  buy  where  they  can  buy  cheapest  ?     The  lower 

1  Wealth  of  Nations,  Book  ir.  Chap.  iii. 
-  Wealth  of  Nations,  Book  iv.  Chap.  L 


166  HISTORY   OF    MONETARY   THEORIES. 

the  rate  the  greater  their  profit.  Would  they  not  be  likely  to 
seek  the  best  markets  ;  and,  if  the}'  appealed  to  government, 
would  it  not  be  to  open  up  those  where  the  cheapest  goods 
were  to  be  found  ?  Would  not  their  interests  and  those  of  the 
people  lie  in  the  same  direction  ?  He  says  they  knew  perfectly 
well  how  to  enrich  themselves,  but  cared  nothing  whether  or 
not  they  enriched  the  public.  How  could  they  enrich  them- 
selves without  enriching  the  public  ?  Is  not  public  wealth 
made  up  of  individual  wealth  ?  Supposing  them  to  be  the  selfish 
and  imscrupulous  creatures  he  assumed,  would  they  not,  for 
their  own  interest,  adopt  precisely  the  same  policy  as  those 
who  were  benevolent  and  upright,  —  buy  in  the  cheapest  and 
sell  in  the  dearest  market, — even  if  they  were  in  conspiracy 
against  manldnd,  and  found  no  difiiculty  in  imposing  upon  the 
feeble  and  derelict  minds  of  noblemen  and  princes,  —  the  rulers 
of  the  nation,  —  so  as  to  bend  the  law  to  their  base  purposes  ? 
But  if  merchants  are  not  to  be  trusted,  if  they  are  certain  to 
combine  against  the  welfare  of  their  fellows,  and  are  only  kept 
to  their  duties  by  the  strong  arm  of  the  law,  what  becomes  of 
the  doctrine  of  Free-Trade,  which  is  based  upon  the  assump- 
tion that  the  mercliant.  when  left  to  himself,  is  certain  to  act 
in  reference  to  the  welfare  of  others  iu  acting  in  reference  to 
his  own.  According  to  Smith,  the  very  agents  who  are  to 
carry  it  out  are  certain  to  prove  false  to  it.  If  they  are  not 
to  be  trusted,  who  are  ?  They  were  as  honest  and  straight- 
forward in  his  day  as  they  are  now,  or  as  they  are  ever  likely 
to  be.  He  had,  however,  no  faith  in  them,  and  vented  his  spleen 
and  hatred,  as  the  only  mode  by  which  they  could  be  made  to 
pay  some  penalty  for  their  rascalities  and  oppressions.  He 
certainly  spent  a  lifetime  to  very  little  purpose  in  erecting  a 
system  impossible  for  the  want  of  proper  instruments  of 
execution. 

It  is  by  the  "  sneaking  arts  of  underling  tradesmen  "  that 
England  is  what  she  is.  As  the  gains  of  the  merchant  must 
be  in  ratio  to  the  means  of  those  with  whom  he  deals,  it  must 
be  for  liis  interest,  and  consequently  liis  object,  to  do  all  he  can 
to  enrich  mstead  of  beggaring  them.  At  the  time  that  Smith 
wrote,  commerce  was  almost  the  only  pacific  influence  at  work 
in  Europe.  It  was  the  bond  of  friendship,  so  far  as  any  such 
bond  existed.  It  was  the  ruling  classes  —  the  landholders, 
with  the  dynastic  pretensions  and  ambitions  of  princes  —  that 


ADAJNI   SISHTH.  167 

converted  Earope  into  one  vast  military  camp.  His  whole 
tirade  is  entirely  misdirected.  There  was  commercial  igno- 
rance enough,  no  doubt.  Compared  with  the  present,  his  was 
a  barbarous  age  ;  but  the  progress  which  has  since  been  made 
has  not  been  the  work  of  kings  or  princes,  or  of  owners  of  the 
soil,  but  of  the  wider  scope  and  influence  of  principles  or 
causes  then  at  work,  though  sadly  hampered  and  thwarted  by 
that  ambition,  ignorance,  and  selfishness  which  have  gradually 
jdelded  to  a  higher  and  better  law.  Smith  saw  no  hope  of  a 
better  state  of  things,  because  he  wholly  ignored  the  moral 
elements  —  the  sense  of  duty  —  as  chief  factors  in  civilization. 
The  foundations  upon  which  he  erected  the  superstructure  of 
his  "  Wealth  of  Nations  "  are  the  selfish  instincts  of  the  race. 
With  such  premises,  it  was  inevitable  that  he  should  make  a 
disastrous  failure.  He  is  the  legitimate  founder  of  the  school 
which  assumes  to  treat  man  by  the  same  methods  that  it  would 
a  lump  of  earth,  or  the  laws  of  gravity  or  motion,  —  which 
assumes  that  as  gravity  or  attraction  is  in  ratio  to  quantity,  so 
man's  nature  is  affected  in  the  same  way ;  so  much  attraction, 
so  much  compliance,  —  with  whom,  as  with  Buckle,  civilization 
is  the  necessary  product  or  evolution  of  given  quantities  of 
moisture  and  heat ! 

"  Country  gentlemen  and  farmers,"  Smith  continues,  "  are,  to 
their  gi-eat  honor,  of  all  people  the  least  si;bject  to  the  wretched 
spirit  of  monopoly.  .  .  .  They  have  no  secrets,  such  as  those  of  the 
greater  part  of  manufacturers ;  but  are  generally  rather  fond  of 
communicating  to  their  neighbors,  and  of  extending,  as  far  as 
possible,  any  new  practice  which  they  have  found  to  be  advan- 
tageous. .  .  .  Country  gentlemen  and  flxrmers,  dispersed  in  different 
parts  of  the  country,  cannot  so  easily  combine  as  merchants  and 
manufacturers,  who  being  collected  into  towns,  and  accustomed  to 
that  exclusive  corporation  spirit  which  prevails  in  them,  naturally 
endeavor  to  obtain  against  all  their  countrymen  the  same  exclusive 
privilege  which  they  generally  possess  against  the  inhabitants  of 
their  respective  towns.  They  accordingly  seem  to  have  been  the 
original  inventors  of  these  restraints  upon  the  importation  of  for- 
eign goods,  which  secure  to  them  the  monopoly  of  the  home  mar- 
ket. It  was,  probably,  in  imitation  of  them,  and  to  put  themselves 
upon  a  level  with  those  who,  they  found,  were  disposed  to  oppi-ess 
them,  that  the  country  gentlemen  and  farmers  of  Great  Britain 
so  far  forgot  the  generosity  which  is  natural  to  their  station,  as  to 
demand  the  exclusive  privilege  of  supplying  their  countrymen  with 
corn  and  butcher's  meat.  They  did  not,  perhaps,  take  time  to  con- 
sider how  much  less  their  interest  could  be  affected  by  freedom  of 
trade,  than  that  of  the  people  whose  advantage  they  followed."  ^ 

1  "Wealth  of  Nations,  Book  iv.  Chap.  ii. 


168  HISTORY   OF  MONETARY   THEORIES. 

Country  gentlemen  and  farmers  are  undoubtedly  a  very 
worthy  class,  and  much  to  be  envied.  If  one  j^ossess  a  better 
variety  of  turnips  or  pigs  or  horses  than  his  neighbor,  he  will 
be  very  likely  to  share  his  good  fortunes  with  him.  But  that 
they  are  by  nature  opposed  to  the  wretched  spirit  of  monopoly, 
and  fell  from  their  gracious  state  through  the  instructions  of 
merchants,  who  plied  them  with  arguments  and  reasons  which 
they  could  not  understand,  much  less  refute,  and  made  good 
their  instructions  by  imposing  prohibitory  duties  upon  corn 
and  butcher's  meat,  —  could  never  have  occurred  to  the  imagi- 
nation of  any  one  but  Smith  ;  for  it  is  difficult  to  conceive  any 
other  person  so  ignorant,  not  only  of  history  but  of  human 
nature,  who  could,  where  he  was  not  interested,  assert  that 
which  is  exactly  opposed  to  the  fact.  The  market  of  the  mer- 
chant is  the  world  ;  and  to  assume  that  he  would  deliberately 
adopt  a  policy  destructive  to  his  own  welfare,  is  to  assert  that 
the  motive  of  self-interest  —  the  very  motive  which  Smith 
assumes  to  be  the  ruling  principle  of  all  action  —  has  no  place 
in  the  human  mind.  He  might  not  have  intended  to  state  an 
untruth :  the  difficulty  with  him  was  that  he  lacked  the  power 
of  distinguishing  between  the  true  and  the  false. 

By  nature,  Smith  was  wholly  unfitted  to  conduct  a  scientific 
discussion  of  any  kind.  He  was  a  dreamer,  not  a  reasoner. 
He  evolved,  to  use  a  cant  plirase,  his  systems  from  his  own 
consciousness.  He  knew  nothing  of  affairs,  and  could  learn 
nothing  from  others.  In  his  antipathy  to  merchants,  or  in  a 
freak  of  passion,  he  lost  sight  of  his  principles  altogether. 
"  He  was,"  says  Dugald  Stewart,  in  his  memoir,  "  certainly  not 
fitted  for  the  general  commerce  of  the  world  or  the  active  busi- 
ness of  life."  The  comprehensive  speculations  with  which  he 
had  been  occupied  from  his  youth,  and  the  variety  of  materials 
which  his  own  invention  continually  supplied  to  his  thoughts, 
rendered  him  habitually  inattentive  to  familiar  objects  and 
to  common  occurrences,  and  he  frequently  exhibited  instances 
of  absence  which  have  scarcely  been  surpassed  by  the  fancy 
of  La  Bruyere.  Even  in  company  he  was  apt  to  be  engrossed 
with  his  studies,  and  appeared  at  times,  by  the  motion  of 
his  lips,  as  well  as  by  his  looks  and  gestures,  to  be  in  the 
fervor  of  composition.  .  .  .  He  was  peculiarly  ill-qualified  to 
take  care  of  his  own  estate,  for  the  proper  management  of 
which  he   was  indebted  to  the  attention  and   care  of  kind- 


ADAM   SMITH.  169 

hearted  relations."  It  is  not  strange  that  a  person  so  wholly 
wanting  in  practical  sense  should  be  equally  wanting  in  the 
perception  of  principles,  in  method,  and  in  originality.  He 
borrowed  his  ideas  of  money  very  largely  from  Law ;  fol- 
lowing him,  like  Hume,  where  he  was  wrong,  and  rejecting 
him  where  he  was  right.  In  urging  the  advantages  of  free- 
dom of  trade,  he  was  fully  anticipated  by  Hume,  "whose 
political  discom-ses,"  says  Stewart,  "  were  of  greater  use  to 
him  than  any  other  works  which  had  appeared  prior  to  his 
lectures."  Had  neither  of  them  lived,  the  whole  question  of 
Free-Trade  and  Protection  would  have  been  precisely  where 
it  is  to-day.  As  already  shown,  the  opinions  held  upon  this 
subject  do  not  result  from  argument  or  statement,  but  from 
the  conditions  in  which  individuals  or  communities  find  them- 
selves placed.  Whoever  feels  that  he  can  undersell  every  one 
else,  welcomes  competition,  —  is  a  Free-Trader ;  he  who  is 
conscious  that  he  cannot,  fears  competition,  —  is  a  Protectionist. 
There  can  be  no  doubt  that  liberal  sentiments  are  gaining 
ground  in  trade,  as  in  all  other  questions  ;  but  in  Free-Trade 
and  Protection,  in  the  sense  in  which  these  words  are  ordi- 
narily used,  there  will  always  remain  the  positive  and  negative 
poles. 

When  the  ignorance  of  Smith  upon  the  subject  upon  which 
he  wrote,  his  want  of  scientific  method,  the  groundlessness  of 
his  assumptions  and  conclusions,  especially  in  reference  to 
money,  are  considered,  the  influence  he  has  exerted  over  suc- 
ceeding generations  is  well  fitted  to  excite  astonishment.  It 
is  to  be  remembered,  however,  that  mankind  always  demand 
some  positive  and  authoritative  statement  of  belief  or  faith, 
and  of  the  nature  and  significance  of  the  problems  or  phenomena 
by  which  they  are  surrounded,  —  and  necessarily  accept  that 
which  appears  most  reasonable,  although  it  may  have  no 
foundation  whatever.  Of  this  the  Ptolemaic  system  of  astron- 
omy is  a  striking  example.  Nothing  could  be  more  true  to 
sense,  or  untrue  to  the  fact.  There  was  nothing  to  violate  the 
ordinary  sense  of  mankind  in  the  teachings  of  Aristotle.  If 
he  could  not  see  their  unreasonableness,  much  less  could  those 
who  followed,  none  of  whom,  for  ages,  possessed  any  thing  like 
his  intellectual  acuteness.  Galen's  system  of  medicine  gained 
possession    of    the   public    mind,    and   became    a    despotism 


170  HISTORY   OF  MONETAKY  THEORIES. 

which  lasted  more  than  fifteen  hundred  years,  only  for  the 
reason  that  it  was  stated  more  authoritatively,  and  with  greater 
show  of  learning,  than  any  other.  By  it  he  assumed  to  meet 
every  possible  condition  of  body  as  well  as  mind  ;  to  be  as  uni- 
versal in  medicine  as  Aristotle  assumed  to  be  in  the  far  broader 
field,  —  the  world.  The  truth  or  falsehood  of  what  either 
proposed  had  nothing  to  do  with  its  acceptance.  In  the 
moral  as  well  as  the  material  world,  that  which  appears  most 
reasonable  to  what  may  be  termed  the  natural  sense  of  man- 
kind is  untrue.  As  the  instincts  are  never  to  be  implicitly 
trusted,  but  are  always  to  be  referred  and  subjected  to  a  sense 
of  duty,  no  matter  with  what  struggle  or  at  what  cost,  so,  in 
the  material  world,  phenomena  are  always  to  be  referred  to  a 
law  which  may  wholly  contradict  the  conclusion  of  the  senses. 
That  which  is  dearest  to  the  human  heart,  as  well  as  to  un- 
tutored observation,  is  always  to  be  put  under  the  foot  of  duty 
and  reason.  Nothing  is  to  be  taken  on  trust ;  every  thing  is 
to  be  referred  to  an  inexorable  law,  —  in  other  words,  self- 
sacrifice,  self-denial,  is  the  condition  of  all  scientific  as  well 
as  of  moral  progress.  Of  all  this  the  Greeks  and  Romans  had 
no  conception.  To  them  the  very  foundation  of  the  sciences 
was  wholly  wanting. 

The  systems  of  Aristotle  and  Galen,  by  absorbing  the  at- 
tention and  satisfying  the  reason  of  mankind,  effectually 
blocked  the  way  to  all  progress  in  the  discovery  of  truth. 
With  them,  in  their  respective  departments,  the  age  of  inven- 
tion, of  originality,  came  to  an  end.  That  which  followed  was 
one  of  imitation,  of  comment,  of  refinement  in  error,  by  means 
of  which  the  race  itself  became  reduced  to  a  condition  ot 
mental  imbecility.  In  the  same  way  Smith,  for  a  hundred 
years,  has  been  the  great  obstacle  to  all  progress  in  the  sub- 
jects upon  which  he  wrote.  As  his  teachings  upon  money 
were  almost  universall}'  accepted,  all  that  subsequent  writers 
have  done  has  been  to  develop  and  push  his  doctrines  to  their 
extremest  terms.  In  them  was  wholly  lost  whatever  of 
freshness  or  strength  their  master  possessed.  The  crowning 
mistake  of  all,  however,  was  in  assuming  that  what  they  erected 
with  so  much  labor  and  pains  deserved  even  the  name  of  a 
science.  They  have  wholly  mistaken  the  foundations  upon 
which  that  of  Political  Economy  is  to  be  erected.  If  such  a 
science  be  possible,  it  must  be  based  upon  the  moral,  rather 


DUGALD    STEWART.  171 

that  the  intellectual  nature  of  man.  With  adequate  moral, 
the  highest  material  conditions  follow  as  a  necessary  result. 
Smith  failed  in  his  attempt,  as  all  must  fail  who  ignore  the 
moral  or  the  sentimental  side  of  man's  nature.  This  is  but  an- 
other name  for  the  ideal  which  far  transcends  all  human  effort. 
Hence  the  insupportable  weariness  of  his  works.  It  is  in 
the  unattainable  that  lies  the  great  charm  of  life,  the  great 
incentive  to  exertion.  The  goal  reached,  the  wished-for  one 
is  still  in  the  distance,  and  is  still  for  ever  to  remain  so.  Smith 
and  his  school  placed  all  good  within  the  reach  of  human  effort. 
They  gave  nothing,  in  assuming  to  give  all. 

The  first  writer  following  Smith  upon  the  subject  of  money, 
deserving  attention,  was  Dugald  Stewart,  Professor  of  Moral 
Philosophy  in  the  University  of  Edinburgh,  who  delivered,  in 
the  early  part  of  the  present  century,  an  elaborate  course  of 
lectures  upon  the  subject  of  Political  Economy.  Stewart  was 
an  ardent  admirer  of  Smith,  and  assumed  to  reduce  to  precise 
and  logical  terms  what  his  great  master  only  more  generally 
outlined.  With  Smith,  he  held  "  that  division  of  labor,  where- 
ever  it  existed  to  any  considerable  extent,  presuj^posed  the 
establishment  of  some  common  medium  of  exchange.  With- 
out this  previous  arrangement,  it  would  be  impossible  for  an 
individual  to  devote  himself  exclusively  to  a  particular  species 
of  employment.  ...  In  process  of  time,  among  all.  civilized 
nations,  gold,  silver,  and  copper  have  supplanted  all  other 
commodities,  as  the  great  instruments  of  commerce."  Smith, 
however,  held  that  the  value  of  these  metals  depended  largely 
upon  their  beauty,  utility  in  the  arts,  and  scarcity  ;  that  such 
qualities,  among  others  still  more  important,  fitted  them  to 
serve  as  money.     To  this,  however,  Stewart  strongly  demurred. 

"  I  certainly  agree  with  Mr.  Smith,"  he  says,  "  excepting  where 
he  states  that  the  intrinsic  value  of  gold  and  silver  was  the 
quality  which  fitted  tliem  for  their  employment  as  coin.  It  appears 
to  me  that  this  intrinsic  value,  which  I  shall  allow  to  gold  and 
silver  to  its  fullest  extent,  ought  to  be  regarded  in  the  theory  of 
money  as  merely  accidental  circumstances,  fi'om  which  it  is  proper 
to  abstract  with  all  possible  care,  as  tending  only  to  embarrass  our 
conceptions;  for  the  same  reason  that,  in  studying  the  theory  of 
mechanics,  we  abstract  from  the  effect  of  friction,  the  rigidity  of 
the  ropes,  and  the  weight  of  materials  of  which  the  machines  are 
composed.  .  .  .  When  gold  is  converted  into  coin,  its  possessor 
never  thinks  of  any  thing  but  its  exchangeable  value,  or  supposes 


172  HISTORY  or  MONETARY   THEORIES. 

a  coffer  of  guineas  to  be  more  A^aluable  because  they  are  capable 
of  being  transferred  into  a  service  of  plate  for  bis  own  use.  .  ,  . 
Why,  then,  should  we  suppose  that,  if  the  intrinsic  A^alue  of  gold 
and  silver  were  completely  annihilated,  they  might  not  still  perform, 
as  well  as  now,  all  the  functions  of  money,  supposing  them  to 
retain  all  those  recommendations  (durability,  divisibility,  &c.) 
formerly  stated,  which  give  them  so  decided  a  superiority  over 
every  thing  else  which  could  be  employed  for  the  same  purpose. 
Supposing  the  supply  of  the  precious  metals  at  present  afforded  by 
the  mines  to  fail  entirely  the  world  over,  there  can  be  little  doubt 
that  all  the  j^late  now  in  existence  would  be  gradually  converted 
into  money,  and  gold  and  silver  would  soon  cease  to  be  employed 
in  the  ornamental  arts.  In  this  case,  a  few  years  would  obliterate 
entirely  all  trace  of  the  intrinsic  value  of  these  metals,  while  their 
value  would  be  understood  to  arise  from  those  characteristical 
qualities  (divisibility,  durability,  &c.)  which  recommend  them  as 
media  of  exchange.  I  see  no  reason  why  gold  and  silver  should 
not  have  maintained  their  value  as  money,  if  they  had  been  appli- 
cable to  no  other  purposes  than  to  serve  as  money.  I  am,  there- 
fore, disposed  to  think,  with  Bishop  Berkeley,  'whether  the  true 
idea  of  money,  as  such,  be  not  altogether  that  of  a  ticket  or 
counter.  ...  It  is  general  consent  alone  which  distinguishes  them, 
when  employed  as  money,  from  any  thing  else  which  circulates  in 
a  country  ;  from  the  paper  money,  for  instance,  which  circulates  in 
Scotland  and  England.  Were  this  island  insulated  from  the  rest  of 
the  world,  the  former,  as  a  medium  of  exchange,  would  possess  no 
advantage  over  the  latter,  excepting  in  so  far  as  it  diminished  the  op- 
portunities of  ft-aud;  nor  would  it  make  the  slightest  difference  on 
the  national  wealth  whether  the  circulating  medium  consisted  of  gold 
or  paper,  or  whether  the  materials  were  abundant  or  scanty."  And 
he  continues,  "this  observation  is  to  me  a  self-evident  proposition. 

"  In  a  country  which  had  no  communication  with  others,  it  is 
obvious  and  indisputable  that  the  precious  metals,  when  formed 
into  money,  would  be  useful  only  as  a  medium  of  exchange  and 
scale  of  valuation.  On  this  supposition,  the  observation  of  Ana- 
charsis  the  Scythian,  quoted  by  Mr.  Hume  in  one  of  his  political 
discourses,  seems  to  be  perfectly  just,  that  gold  and  silver  appeared 
to  be  of  no  use  to  the  Greeks  but  to  assist  them  in  enumeration  and 
arithmetic.  .  .  .  The  only  iitility  which  is  essential  to  gold  and 
silver  as  media  of  exchange  is  their  peculiar  adaptation  (divisi- 
bility, durability,  &c.)  to  this  purpose.  And,  though  I  would  not 
take  it  upon  me  to  say  that  their  uses  in  the  arts  detract  from  their 
value  in  this  respect,  yet  these  ai-e  so  far  from  being  essential  to 
their  quality  as  money  that  they  are,  in  some  respects,  disadvan- 
tageous, by  rendering  the  theory  of  money  more  complicated  than 
it  otherwise  would  have  been."  ^ 

The  groundlessness  of  Stewart's  assumption,  in  common 
with  Smith,  that  money  was  an  invention,  —  an  arrangement 
entered  into  from  a  sense  of  its  necessity,  —  has  already  been 

1  Lectures  on  Political  Economy,  Part  i.  Book  ii. 


DUGALD    STEWART.  173 

sufficiently  shown.  The  conclusion,  however,  to  which  Stew- 
art came,  that  value  is  not  a  necessary  attribute  of  money ; 
and,  if  not  necessary,  it  is  no  attribute  of  it,  was  the  logical 
sequence  of  the  premises  laid  down  by  the  former.  Smith 
would  by  no  means  have  admitted  that  money  might  be  wholly 
without  value, —  only  that  value  was  not  its  most  essential 
attribute  ;  that  the  qualities  which  chiefly  fitted  gold  and 
silver  to  serve  as  money  were  their  di\dsibility,  fusibility, 
durability,  and  the  like.  As  they  must  be  taken  from  com- 
merce at  their  value  as  merchandise,  the  substitution  of  a  less 
expensive  article  therefor  was  so  much  clear  gain.  An  in- 
expensive wheel  of  commerce  took  the  place  of  an  expensive 
one.  Assuming,  for  the  moment,  Smith's  premises  to  be  cor- 
rect, his  next  step  should  have  been  to  show  how  far  the  value 
of  money  was  intrinsic,  and  how  far  it  was  factitious  ;  how  inex- 
pensive might  be  the  medium  employed,  —  in  other  words,  how 
far  its  nominal  might  exceed  its  real  value :  for  it  is  evident 
that,  if  media  of  exchange  pass  at  their  real  value,  one  must 
be  as  exj^ensive  as  another.  When  reduced  to  such  terms, 
the  untenableness  and  absurdity  of  Smith's  propositions  will 
at  once  be  seen.  There  is  no  middle  ground :  the  real  value  of 
money  must  equal  its  nominal  value,  or,  in  case  of  symbols, 
the  values  of  what  they  represent  must  equal  their  nommal 
value  in  coin,  or  value  is  no  attribute  of  money  whatever. 
The  latter  conclusion  is  an  irresistible  one,  from  the  premises 
which  Smith  laid  down,  and  Stewart  has  the  merit  of  first 
giving  a  logical  and  precise  form  to  that  which  came  from  his 
great  master  as  a  very  indistinct  and  ill-defined  proposition. 

"  We  never  think,"  says  Stewart,  "  when  we  receive  the 
precious  metals  as  money,  of  their  value  in  the  arts."  But 
were  they  not  first  taken,  and  chiefly,  for  their  value  in  the 
arts  ?  and  if  we  do  not  now  consciously  go  tlirough  the  same 
mental  process  that  was  gone  through  when  they  were  first 
taken,  is  it  not  that  such  consciousness  is  concealed  from  us 
by  habit,  not  that  it  does  not  exist  ?  We  are  constantly  prac- 
tising, without  apparent  reflection  or  thought,  processes  which, 
in  the  outset,  cost  us  infinite  attention,  labor,  and  painstaking 
to  acquire.  That  we  at  last  come  to  practise  these  uncon- 
sciously, is  no  proof  that  the  mind  is  not  engaged  in  one  case 
as  in  the  other.  Stewart,  however,  wholly  misstated  the  fact 
that  gold  and  silver  are  taken  without  any  consciousness  of 


174  HISTORY   OF  MONETARY  THEORIES. 

their  value  in  the  arts.  As  a  rule,  we  do  not  raise  the  inquiry ; 
•we  assume  from  experience  that  coins  are  what  they  purport  to 
be :  but  let  it  be  noised  abroad  that  debased  coins  of  a  partic- 
ular denomination  are  in  circulation,  then  every  one  of  the 
kind,  good  or  bad,  will  be  subjected  to  the  closest  scrutiny, 
and,  if  taken  at  all,  will  only  be  taken  at  its  value  in  the 
arts,  measured  by  the  amount  of  pure  metal  it  contains. 

"  If  all  the  mines,"  says  Stewart,  "  should  become  exhausted, 
then  all  the  gold  and  silver  in  the  arts  would  be  converted  into 
coin  ;  and  all  remembrance  of  their  value  in  the  arts  would 
inevitably  fade  away.  As  there  would  be  no  idea  of  their 
value,  they  would  have  no  value."  Suppose  a  physician,  in 
erecting  a  system  of  hygiene,  should  make  provision  for  the 
total  disappearance  of  oxygen  from  the  air.  The  only  proper 
answer  would  be,  that  oxygen  will  not  disappear.  It  is  in  the 
air  by  Divine  ordination.  If  the  physician  persist,  the  only 
proper  course  for  him  is  to  attack  and  upset  the  Divine  order. 
It  is  just  as  absurd  to  deduce  a  law  in  reference  to  money  by 
assuming  that  gold  and  silver  may  cease  to  be  produced. 
There  is  no  more  probability  that  they  will  not  be  produced 
than  that  oxygen  will  cease  to  be  an  element  of  the  air.  When 
gold  and  silver  disappear,  ci\alization  will  disappear  with  them. 
The  one  is  reared  upon  the  other.  That  Stewart  could  use 
such  illustrations  shows  how  incompetent  he  was  for  all  such 
investigations.  He  was  the  Schoolman  over  again,  in  assuming 
to  solve  by  dialectics  what  will  yield  only  to  scientific  analy- 
sis. But,  even  if  the  mines  should  fail,  all  the  gold  and  silver 
in  existence  would  by  no  means  go  into  money.  It  is  not 
probable  that  for  a  long  time  the  relative  proportions  of  that 
held  as  money  and  that  going  into  the  arts  would  be  materi- 
ally changed.  As  it  gradually  disappeared  from  loss  and  attri- 
tion, commerce  and  trade,  and  with  these,  civilization,  and 
wealth,  would  gradually  die  out.  As  these  disappeared,  gold 
and  silver  would  graduallv  flow  back  into  the  arts,  and  almost 
wholly  in  time  ;  for,  as  there  would  be  no  trade,  money  would 
not  be  wanted.  It  is  a  fact  of  universal  observation,  that  gold 
and  silver  possessed  by  the  savage  races  are  not  used  as  money, 
but  almost  wholly  in  the  arts.  They  cover  themselves,  if  they 
can,  with  them,  and  have  little  other  sense  of  their  value 
or  use. 

"  If  England  were  insulated  from  the  rest  of  the  world," 


DUGALD   STEWAET.  175 

says  Stewart,  "  then,  for  that  country,  gold  and  silver,  as  a 
medium  of  exchange,  would  possess  no  value  over  the  most 
worthless  of  substances."  This  absurdity  is  repeated  by  every 
subsequent  writer  upon  the  subject  of  money.  Suppose  Eng- 
land to  be  the  world,  what  then  ?  "Would  all  sense  of  beautv, 
of  utility  or  value  be  lost  to  its  people  ?  Suppose,  as  Stewart 
assumes,  England  isolated,  a  Yorksliire  grazier  should  take  with 
him  to  London  a  lot  of  beeves ;  and  upon  their  sale  should  be 
offered  a  leather  medal,  with  curious  hieroglyphics  stamped 
upon  it,  in  payment.  The  seller  at  first  might  consider 
the  offer  as  a  good  joke ;  but,  on  finding  the  purchaser  in 
earnest,  he  would  believe  himself  to  be  dealing  with  a 
madman,  and  would  take  good  care  to  get  his  beeves  into 
his  possession  again,  and  to  rid  himself  of  such  a  dangerous 
customer.  To  be  logical,  Stewart  must  assume  that,  were 
England  isolated  from  all  the  world,  its  people  would  have 
a  sense  of  neither  use  nor  beauty;  in  other  words,  that 
they  would  be  lower  in  the  scale  than  any  race  or  tribe  ever 
yet  discovered.  If  the  precious  metals  have  no  intrinsic  value, 
then  the  Scythian  was  correct  in  assuming  money  to  be  useful 
only  for  the  purpose  of  assisting  in  numeration  and  arithmetic. 
It  is  for  this  reason  that  Stewart  held  their  value  to  be  disad- 
vantageous, in  complicating  thereby  the  theory  of  money.  If 
value  be  not  an  attribute  of  money,  he  was  quite  right  in 
eliminating  from  it  all  idea  of  such  quality.  Figures  convey 
to  us  onh^  ideas  of  numbers.  If  the}"  conveyed  other  ideas, 
they  might,  from  the  distraction  that  would  be  caused,  render 
it  impossible  to  use  them  for  the  pui-pose  of  making  any  cal- 
culation whatever. 


Again :  — 

"  It  must  not  therefore  be  imagined,"  says  Stewart,  "  when  I  lay 
so  great  a  stress  on  the  properties  of  the  precious  metals  (divisi- 
biUty,  durability,  and  the  like),  abstracting  from  their  intrinsical 
vahie,  in  studying  the  theory  of  money,  that  I  would  mean  to 
insinuate  any  apology  for  these  arbitrary  operations  in  coinage 
which  have  been  so  often  practised  by  diffei*ent  princes.  If  goTd 
and  silver  possessed  no  intrinsic  value,  such  operations  might  be 
no  less  iniquitous  than  they  always  have  been ;  for  their  iniquity 
arises  not  from  the  useful  purposes  to  whicli  tlie  precious  metals  are 
subservient  in  the  arts,  but  from  the  universality  of  their  employ- 
ment as  media  of  exchange ;  and,  indeed,  one  of  my  chief  reasons 


176  HISTORY  OF  MONETARY  THEORIES. 

for  dwelling  so  long  upon  the  present  subjects  was  to  prevent  so 
very  important  a  truth  as  that  which  relates  to  the  good  faith  that 
ought  to  be  maintained  with  regard  to  the  coinage,  from  being 
placed  on  what  I  conceive  to*  be  an  unsound  foundation  ;  and," 
he  continues,  quoting  approvingly  from  Law,  "  money  is  not  the 
value  for  which  goods  are  exchanged,  but  the  value  by  which  they 
are  exchanged."  ^ 

Now,  if  value  be  wholly  abstracted  from  money,  what  harm 
can  come  of  the  arbitrary  operations  of  princes  in  coinage  ? 
They  never  change  the  denominations  of  the  coin  they  debase. 
If  the  sole  use  of  money,  as  asserted  by  Stewart,  be  to  assist 
in  numeration  and  arithmetic,  then  the  different  denominations 
of  coin  have  only  the  force  of  numerals  ;  and  a  piece  of  leather 
upon  which  is  imprinted  the  word  "  dollar "  is  in  its  proper 
essence  the  same  thing  as  a  piece  of  gold  upon  which  the  same 
word  is  impressed.  Hume  was  more  logical  and  consistent. 
Agreeing  with  Stewart  that  the  only  value  of  money,  as  such, 
was  to  assist  in  numeration  and  arithmetic,  he  took  the  ground 
that  the  currency  should  be  debased,  as  the  means  of  eliminat- 
ing value  from  it ;  naively  remarking,  that  such  debasement 
should  be  effected  in  such  a  sly  way  that  the  people  should 
not  discover  the  swindle.  Of  the  two,  Hume  is  to  be  preferred. 
The  admission  that  the  debasement  was  a  swindle  had  the 
merit,  at  least,  of  putting  the  people  on  their  guard.  It  sug- 
gested reasons  for  inquiry  and  investigation ;  while  Stewart, 
assuming  similar  grounds  to  Hume  as  to  the  nature  of  money, 
while  expressing  horror  at  the  legitimate  consequences  of  his 
doctrines,  leaves  the  reader  without  even  a  thread  to  lead  him 
out  of  the  labyrinth  in  which  he  is  involved. 

Again :  — 

"  From  the  functions  of  the  precious  metals  as  media  of  ex- 
change," says  Stewart, "  they  gradually  and  naturally  came  to  form 
the  common  scale  of  valuation.  For  this  end,  indeed,  they  are 
naturally  adapted,  from  the  mathematical  exactness  with  which 
metals,  in  consequence  of  their  divisibility  and  fusibility,  are  fitted 
to  express  every  conceivable  variation  of  value,  —  a  quality,  indeed, 
of  so  much  importance  in  their  use  as  money  that  it  probably  con- 
tributed more  than  any  thing  else  to  establish  their  employment 
among  commercial  nations.  The  existence,  too,  of  such  a  standard 
would  necessarily  render  the  ideas  of  relative  value  much  more 

^  Lectures  on  Political  Economy,  Part.  i.  Book  ii. 


DUGALD   STEWART.  177 

precise  and  definite  than  they  otherwise  would  have  been,  by  lead- 
ing men  to  an  arithmetical  statement  of  relations  which,  in  the 
infancy  of  commerce,  Avould  have  been  estimated  in  a  very  gross 
and  inaccurate  manner."  ^ 

In  the  preceding  paragraph,  in  place  of  "  standard  of  value," 
Stewart  has  "  scale  of  valuations."  He  certainly  has  the  advan- 
tage of  Smith  and  the  Economists  in  the  accuracy  of  his  defi- 
nitions. It  would  be  a  contradiction  in  terms  to  call  that  a 
standard  of  value  which  had  no  value.  A  thing  may  be  a 
scale,  without  being  a  standard.  A  yardstick  is  a  scale  for 
measuring  distance  or  extension,  but  not  the  standard  of  dis- 
tance or  extension. 

If  all  value  is  to  be  abstracted  from  money,  then  of  what 
advantage  are  the  qualities  of  divisibility  and  fusibility,  in 
the  materials  composing  it?  Why  not  have  the  denominations 
which  are  fitted  to  express  "every  conceivable  variation  of 
value  "  all  of  the  same  size  and  fineness  ?  A  bank-note  for  a 
thousand  dollars  has  precisely  the  same  size  and  quality  of 
material  as  a  note  for  one  dollar.  The  only  difference  is  in 
their  inscriptions.  There  could  be  no  possible  advantage  in 
making  the  size  of  the  notes  correspond  with  their  nominal 
values :  in  making,  say,  the  surface  of  a  dollar  note  equal  to 
cne  square  inch,  and  the  surface  of  a  thousand  dollar  note 
equal  to  a  thousand  square  inches.  According  to  Stewart's 
theory,  the  qualities  which  fit  gold  and  silver  for  money  — 
divisibility  and  fusibility  —  are  of  the  least  importance ;  for 
pieces  of  similar  size  may  be  made  by  their  inscriptions  to 
express  "  every  conceivable  variation  of  value."  The  existence 
of  a  scale  of  valuation  like  that  proposed  by  him  would,  he 
says,  render  the  ideas  of  value  much  more  precise  and  definite 
than  they  otherwise  would  have  been.  But  how  can  ideas  of 
relative  value  be  made  more  precise  by  comparing  them  with 
a  scale  from  which  all  value  is  abstracted  ?  How  can  nothing 
be  made  to  be  the  measure  of  the  value  of  something?  A 
definite  idea  is  conveyed  in  the  statement  that  a  gold  dollar 
measures  the  value  of  a  bushel  of  corn  ;  but  what  idea  can  be 
formed  of  the  value  of  the  corn  from  a  statement  that  its  value 
is  that  expressed  upon  a  worthless  piece  of  leather  or  paper  ? 

1  Lectures  on  Political  Economy,  Part  i.  Book  ii. 

12 


178  HISTOEY  OF  MONETARY  THEORIES. 


Stewart  was  among  the  earliest  wiiters  to  suggest  that 
the  quantity  of  money  requii^ed  by  a  community  was  in  ratio 
to  the  rapidity  of  its  circulation.  This  suggestion,  which  natu- 
rally resulted  from  the  assumption  that  money  is  not  capital, 
but  a  scale  of  valuation,  or  an  aid  in  enumeration  and  arith- 
metic, has  become  an  axiom  among  all  modern  Economists. 
Stewart  undertakes  to  prove  his  assumption  in  the  following 
manner :  — 

"  In  Mr.  Pinto's  *  Treatise  on  Circulation  and  Credit,'  it  has  been 
ehown,  with  much  ingenuity,  how  a  quick  circulation  makes  money 
go  far  in  exchanges.  "^  And  the  following  anecdote  is  mentioned  by 
this  very  well  informed  writer  as  an  illustration  :  '  During  the 
siesje  of  'Tom-nay,  in  1745,  and  for  some  time  before,  all  communi- 
catton  beinfj  cut  off,  it  was  a  matter  of  some  difficulty  to  pay  the 
garrison,  for  want  of  money.  It  was  thought  advisable  to  borrow 
from  the  cantines  [sutlers]  the  sura  of  7,000  florins.  It  was  all  that 
they  had.  At  the  end  of  the  week,  the  7,000  florins  had  come  back 
to  the  cantines,  when  the  same  sum  was  borrowed  again.  This  was 
repeated  for  seven  weeks,  until  the  surrender ;  so  that  the  same 
7,000  florins  did  the  work  of  49,000  florins.  It  was,  therefore,  with 
very  good  reason  that  Bishop  Berkeley  long  ago  proposed  the  fol- 
lowing query :  Whether  less  money  swiftly  circulating  be  not 
in  fact  equivalent  to  more  money  slowly  circulating ? '" ^ 

Suppose  the  sutlers  had  had  the  whole  49,000  florins,  and 
that  these  had  been  borrowed  at  once,  Stewart's  illustration 
would  have  had  no  meaning  or  significance  whatever.  What 
was  this  transaction?  The  garrison  was  in  arrears  of  pay. 
No  money  could  be  obtained  but  of  the  sutlers,  and  they  had 
but  a  small  amount  compared  with  what  was  wanted.  They 
had,  however,  a  plenty  of  camp  supplies.  The  money  they 
had  was  borrowed,  and  paid  out  to  the  soldiers.  Such  as 
received  any  went  immediately  to  the  sutlers,  and  supplied 
their  wants  as  far  as  the  money  received  would  go.  It  was 
then  reloaned,  again  paid  out  to  the  soldiers,  and  again  paid 
out  for  supplies.  It  required  seven  different  transactions  to 
accomplish  that  which,  had  a  sufficient  amount  of  money  been 
in  hand,  would  have  been  accomplished  by  one.  It  was  pre- 
cisely like  a  process  in  mechanics,  where  the  time  required  for 
lifting  a  given  weight  depends  wholly  upon  the  degree  of 
power  applied.     The  same  amount  is  expended  whether  the 

1  Lrectures  on  Political  Economy,  Part  i.  Book  ii. 


DUGALD   STEWART.  179 

weight  be  lifted  in  one  minute  or  in  one  hour.  The  less  the 
degree  of  power  the  greater  the  time.  The  result  of  these 
transactions  was,  that  in  the  course  of  seven  weeks  the  garrison 
had  been  paid  49,000  florins,  the  sutlers  had  sold  supplies  to  the 
amount  of  49,000  florins,  and  the  commandant  or  government 
owed  them  49,000  florins :  so  that  in  the  end  the  latter  had  con- 
verted their  supplies  into  money,  and  had  in  hand  7.000  florins, 
and  a  debt  against  the  government  or  commandant  for  49.000 
florins.  From  all  this  Stewart  deduces  a  law,  —  that  the 
amount  of  currency  required  is  in  ratio  to  its  activity.  Sup- 
pose the  garrison  had  required  a  certain  amount  of  forage 
h-ing  twenty  miles  off ;  and  that,  having  but  one  horse,  ten 
days  were  required  for  its  transportation.  With  ten  horses,  the 
same  work  might  have  been  done  in  a  single  dsij.  Would 
Stewart  from  this  fact  have  attempted  to  prove  that  one  horse 
could  do  the  work  of  ten  ?  We  wonder  he  did  not  fortify  his 
argument  by  the  following  syllogism:  "ten  horses  can  do 
so  much  work  in  one  day ;  one  horse  can  do  the  same  work  in 
ten  days ;  therefore  one  horse  can  do  the  work  of  ten  horses." 
It  is  really  astonishing  how  great  men,  or  those  who  have  the 
reputation  of  being  such,  can  repeat  such  puerile  and  un- 
meaning nonsense,  and  flatter  themselves  that  they  have 
proved  some  grand  principle  thereby. 

"  From  these  observations,  it  seems  evident,"  says  Stewart,  "  that 
the  quantity  of  money  and  notes  in  circulation 'must  bear  but  a 
small  proportion  to  the  value  of  the  goods  to  be  bought  and  sold, 
and  that  this  proportion  must  vary  according  to  the  quickness  with 
which  the  money  circulates  or  shifts  from  one  hand  to  another. 
According  to  Mr.  Pinto,  there  is  not  in  the  whole  world  half  the 
silver  coin  which  would  pay  all  the  expenses  of  Paris  for  a  sins;le 
year,  if  the  same  piece  were  never  to  change  its  possessor  but 
once."  ^ 

If  the  proportion  of  money  to  the  goods  to  be  bought  and 
sold  be  small,  then  the  amount  of  goods  bought  and  sold  will 
be  small.  Stewart  has  only  shown  that,  with  a  small  amount 
of  money,  seven  weeks  were  required  to  effect  exchanges 
which  might,  with  an  adequate  amount,  have  been  made  in 
one.  There  is  no  more  escape  from  this  law  of  proportion 
between  money  and  transactions  than  there  is  from  the  law 
of  gravity.     The  one  is  as  deeply  gromided  in  the  nature  of 

1  Lectures  on  Political  Economy,  Book  i.  Part  ii. 


180  HISTORY   OF  MONETARY  THEORIES. 

things  as  the  other.  Whether  there  were  or  were  not  a  suffi- 
cient amount  of  silver  in  the  world  to  pay  the  expenses  of 
Paris  for  a  single  year  has  notliing  more  to  do  with  the  ques- 
tion of  the  activity  of  money,  and  the  quantity  dependent 
upon  such  activity,  than  if  there  had  been  silver  enough  in 
the  world  to  pay  the  expenses  of  Paris  for  a  thousand  years. 

« In  order  to  illustrate  this  subject  a  little  farther,"  says  Stewart, 
"I  shall  suppose  that  a  laboring  man  gains  ten  shillings  a  week, 
which  he  receives  always  on  Saturday.  This  man  may  be  said,  on 
a  medium,  to  be  possessed  of  five  shillings  ;  and  a  hundred  men  in 
this  situation  may  be  said  to  be  in  possession  of  £25.  This  is  all 
they  have  used,  though  they  have  each  of  them  spent  ten  shillings 
a  week. 

"  I  make  a  second  supposition,  —  that  each  of  these  men  lives  on 
credit ;  that  his  ten  shillings  are  spent  by  the  time  they  are  earned  ; 
and  that  every  man  pays  his  debt  when  be  receives  his  weekly 
wages.  In  this  case,  the  money  may  never  have  been  a  single  hour 
in  their  hands ;  and  it  is  a  chance  of  a  hundred  to  one  if  they  are 
masters  of  twenty  shillings  amongst  them ;  and  yet  each  of  them, 
as  before,  spends  ten  shillings  a  week. 

"  I  have  only  another  supposition  to  make  :  that  each  of  these  hun- 
dred laborers  will  live  at  the  same  rate  as  formerly ;  that  they  ask 
no  credit ;  and  that  they  are  paid  their  wages  once  a  year.  They 
will  thus  receive  at  once  £26,  which,  having  no  other  use  for  their 
money,  they  will  gradually  spend  on  their  families,  in  the  course  of 
a  year,  at  the  rate  of  ten  shillings  a  week.  It  is  evident  that  these 
men  will,  at  a  medium,  be  possessed  of  £13  apiece,  and  that  their 
whole  money  will  be  equal  to  £1,300 ;  though  their  wage  and  con- 
sximption  are  the  same  as  those  of  a  hundred  men  who  could  not 
produce  twenty  shillings  among  them. 

"  The  obvious  inferences  from  these  suppositions  are :  firstly^ 
that  £25  with  a  quick  circulation  will  go  as  far  as  £1,300  with 
a  slow  circulation ;  secondly,  that,  even  where  the  circulation  is 
equally  quick,  £1  with  credit  will  purchase  as  much  as  £25  without 
credit;  and,  thirdly,  that,  as  both  the  circulation  and  quantity  of 
money  may  vary  in  consequence  of  a  variety  of  causes,  both  natu- 
ral and  moral,  it  is  extremely  improbable  that  the  money  in  circu- 
lation should  always  bear  a  fixed  and  invariable  proportion  to  the 
value  of  all  the  commodities  used  in  commerce."  ^ 

If  money  be  capital,  or  the  representative  of  capital,  and  if 
when  it  is  exchanged  it  is  exchanged  for  other  kinds  of  capital, 
then  there  can  be  no  greater  activity  in  money  than  in  other 
kinds  of  capital ;  and  there  can  be  no  relation  whatever  be- 
tween its  activity  and  quantity.     There  would  be  just  as  much 

1  Lectures  on  Political  Economy,  Part  i.  Book  ii. 


i 


DUGALD    STEWART.  181 

sense  in  sapng  that  the  quantity  of  wheat  necessary  for  the 
consumption  of  a  community  was  in  ratio  to  the  rapidity  of 
its  movement :  that  is,  if  the  rapidity  of  its  motion  be  made 
twice  as  great,  one-half  the  ordinary  quantity  will  suffice.  Or, 
to  give  another  illustration.  It  not  unfrequently  happens  that 
a  pair  of  steelyards  for  weighing  large  quantities  will  serve  for 
half-a-dozen  families.  It  is  borrowed,  or  passes  from  one  to 
the  other  as  they  have  occasion  to  use  it.  If  all  can  use  it, 
then  the  rapidity  or  diligence  with  which  it  is  used  marks  its 
value.  If  such  pair  of  scales  cost  a  hundred  dollars,  and  if  it 
will  sujffice  for  the  wants  of  the  six  families,  it  saves  the  pur- 
chase of  five  other  pair,  although  each  family  may  frequently 
use  it.  This  is  precisely  Stewart's  idea  as  to  money,  and  this 
is  the  meaning  of  his  "rapidity  of  circulation."  He  over- 
looked the  fact,  that,  when  money  was  used  as  the  measure  of 
value  or  the  scale  of  valuation,  the  thing,  the  scale  itself, 
passed  from  the  party  using  it  to  the  party  whose  goods  had 
been  purchased  and  measm-ed  by  it.  The  scale  no  longer 
remains  with  the  six  families;  but  may  pass  into  the  next 
neighborhood,  or  into  England  or  France  or  China,  if  the 
goods  of  those  countries  were  purchased  by  its  use. 

With  Stewart  and  the  modern  Economists,  money  is  an 
entity,  possessed  of  volition  and  will,  flying  about  the  country 
eager  to  do  some  good  deed  ;  an  active  and  lively  piece  doing 
twice  the  work  of  a  dull,  phlegmatic  one.  But  money  cannot 
move  unless  something  else  moves,  no  matter  how  eager  it  may 
be  for  work.  Its  eagerness  must  find  its  complement  in  some 
other  kind  of  property ;  so  that  if  vohtion,  will,  and  activity 
be  predicated  of  one,  volition,  will,  and  activity  must  be  pre- 
dicated of  the  other.  Money  has  no  attribute  of  activity  dif- 
ferent from  that  possessed  by  all  other  kinds  of  merchandise. 
The  use  of  one  involves  the  use  of  the  other ;  the  employment 
of  one  involves  the  emplojTnent  of  the  other.  In  the  illustra- 
tion^iven  by  Stewart,  just  as  much  money  was  required  when 
the  laborers  used  that  received  by  them  in  the  pajonent  of 
debts  contracted  during  the  week  just  closed,  and  had  posses- 
sion of  it  for  only  an  hour  or  so,  as  when  they  used  it  in  pay- 
ment of  merchandise  purchased  during  the  one  ensuing.  Equal 
provision  of  money  had  to  be  made  in  either  case.  It  mattered 
little  in  whose  hands  the  money  might  be,  for  a  few  days, 
whether  in  those  of  the  laborer  or  shopkeeper.     In  the  case 


182  HISTORY    OF    MONETAEY   THEORIES. 

where  the  laborers  were  paid  at  the  end  of  the  year,  and  held 
on  hand,  during  the  succeeding  one,  one-half,  on  an  average,  of 
their  wages,  they  simply  allowed  their  employers  the  use,  with- 
out interest,  of  the  whole  amount  of  their  wages  for  the  year. 
If  they  held  them  on  hand  till  they  were  expended,  they  de- 
prived themselves  of  interest  upon  the  amount  so  held.  If  100 
men  should  hold  unemployed,  for  six  months,  XI, 300,  society 
would  be  deprived  of  the  use  of  a  corresponding  amount  of 
cai3ital,  in  the  same  way  as  it  would  if  an  equal  amount  of 
money,  previously  in  circulation,  were  to  be  hoarded.  But  to 
infer  from  such  operations  that  the  amount  of  money  required 
by  a  community  is  to  be  measured  by  the  degree  of  its  ac- 
tivity, is  an  absurdity  that  can  only  be  matched  by  Aristotle, 
by  the  Schoolmen,  or  by  modern  Economists,  who  are  more 
wild  and  extravagant,  if  possible,  than  either. 

One  of  the  great  evils  resulting  from  the  reputation  of  such 
a  man  as  Dugald  Stewart  is,  that  every  word  that  he 
uttered,  which  was  recorded  by  himself  or  by  others,  is  care- 
fully gathered  up  and  put  into  his  "  works."  In  the  case 
of  Stewart,  these  are  swelled  to  eleven  ponderous  volumes, 
full  of  propositions  of  the  correctness  of  not  one  of  wliich 
the  reader  can  have  the  least  assurance.  Had  his  "  liter- 
ary executor,"  instead  of  carefully  raking  up,  burned  tlu-ee 
quarters  of  all  he  left,  he  would  have  rid  the  world  of  a 
vast  mass  of  rubbish,  and  the  painstaking  student  of  a  great 
deal  of  the  most  irksome  toil.  It  may  be  set  down  as  a  maxim, 
that  a  person  who  assumes  to  write  authoritatively  upon  every 
subject  will  write  well  upon  none.  Life  is  not  long  enough 
for  one  man  to  know  every  thing,  or  to  construct  an  universal 
science. 

Simultaneously,  almost,  with  the  publication  of  Stewart's 
Lectures  on  "  Political  Economy "  came  the  report  of  the 
famous  Bullion  Committee,  wliich  has  occupied  so  wi^e  a 
space  in  the  discussion  of  financial  and  monetary  subjects.  It 
is  well  known  that  the  Bank  of  England,  in  obedience  to  an 
"  Order  in  Council,"  suspended  paj-ment  in  February,  1797. 
The  suspension  was  caused  by  the  extraordinary  demands 
made  upon  it  by  the  government  in  the  wars  growing  out  of 
the  French  Revolution.  The  financial  position  of  England 
had  been  previously  somewhat  weakened  b}'  enormous  ex- 


THE  BANK  OF  EXGLAXD.  183 

portations  of  bullion  in  the  purchase  of  bread-stuffs,  in  conse- 
quence of  disastrous  harvests,  particularly  that  of  1795. 
Wheat,  which  in  January  of  that  year  was  worth  oos.  the 
quarter,  reached,  in  August,  108s.  the  quarter.  Enormous 
importations  were  the  consequence.  At  the  same  time,  gov- 
erniEient  was  in  the  market  for  a  large  loan,  the  proceeds  of 
which  were  in  a  great  measure  to  be  expended  abroad.  Sim- 
ilar loans  had  been  made  in  1793  and  1794  :  that  for  1793 
being  X701,475  ;  that  for  1794  being  £2,601,053;  and  that  of 
1795  being  X6,253,151 :  making  a  total,  in  three  years,  of 
X9,555,679,  to  be  used  chiefly  in  military  operations.  The 
means  for  meeting  these  loans  were  supplied  through  the 
Bank,  as  the  great  financial  institution  of  the  kingdom. 

In  order  to  convey  an  adequate  idea  of  the  nature  and 
functions  of  the  Bank,  and  of  the  influence  it  exerted  as  an 
instrument  of  commerce  and  as  an  arm  of  the  government,  it 
is  necessary  to  give  a  brief  sketch  of  its  organization  and  his- 
toTj.  The  Act  by  which  it  was  established  was  entitled,  "  An 
Act  for  granting  to  their  Majesties  several  duties  upon  tonnage 
of  ships  and  vessels,  and  upon  beer,  ale,  and  other  liquors  ; 
and  for  securing  certain  recompenses  and  advantages  in  said 
act  mentioned,  to  such  persons  as  should  voluntarily  advance 
the  sum  of  £1,500,000  toward  carrjing  on  the  war  with 
France."  After  a  variety  of  provisions  relating  to  the  duties 
to  be  imposed,  the  Act  went  on  to  declare  that  the  subscribers 
to  a  loan  of  £1,200,000  might  be  formed  into  a  corporation  to 
be  styled  "  The  Government  and  Company  of  the  Bank  of 
England."  The  whole  sum  was  subscribed  within  ten  days 
after  the  opening  of  the  books.  The  charter  was  thereupon 
issued  (July  27,  1694),  and  the  Bank  went  immediately  into 
operation.  For  the  sum  of  £300,000,  which  was  to  form  no 
part  of  the  capital  of  the  Bank,  the  subscribers  were  to  re- 
ceive annuities  for  one,  two,  and  three  lives.  Upon  the  loan  to 
the  government,  wliich  formed  the  capital  of  the  Bank,  the 
latter  was  to  receive  interest  at  the  rate  of  eight  per  cent,  with  an 
additional  annual  allowance  of  £4000  for  management ;  making 
the  whole  income  from  this  source  £100,000  annually.  The 
Bank  was  authorized  to  issue  its  notes  as  money,  to  an 
amount  equalling  its  capital.  It  was  to  deal  in  bills  of  ex- 
change, and  in  gold  and  silver  bullion  ;  but  was  restricted  fi'om 


184  HISTORY   OF  MONETARY  THEORIES. 

trading  in  any  "  goods,  wares,  and  merchandise  whatsoever." 
It  was  to  make  no  loans  to  government  but  by  permission  of 
Parliament.  Its  charter  was  to  extend  for  twelve  years,  or 
tUl  twelve  months'  notice  to  be  given  after  August  1, 1705. 

It  will  thus  be  seen  that  the  entire  capital  of  the  Bank  was 
loaned  to  the  government.  Pro-sdsion  for  the  redemption  of 
its  notes,  consequently,  had  to  be  made  by  that  for  which  they 
were  issued,  and  by  the  deposits,  which,  upon  its  organization, 
it  received  in  very  considerable  amounts.  In  1697,  its  charter 
was  extended  till  twelve  months' notice  after  August  1,  1710. 
In  1708,  it  was  again  extended  tUl  twelve  months'  notice 
after  August  1,  1732 ;  the  Bank  advancing  to  government 
£2,175,027  17«.  lOd.,  its  capital  being  increased  by  a  like 
amount.  By  the  provision  of  tliis  Act,  authority  was  given  to 
the  Bank  to  issue  its  notes  for  any  amount  whatever.  The 
Act  of  1708  further  provided :  "  That,  during  the  continuance  of 
the  corporation,  it  shall  not  be  lawful  for  any  body,  politic  or 
corporate  whatsoever,  created  or  to  be  created,  or  for  any 
other  persons  whatsoever,  united  or  to  be  united  in  covenants  or 
partnership,  exceeding  the  number  of  six  persons,  in  that  part 
of  Great  Britain  called  England,  to  borrow,  owe,  or  take  up 
any  sum  or  sums  of  money  on  their  bills  or  notes,  payable  on 
demand,  or  at  less  time  than  six  montlis  from  the  borrowing 
thereof." 

It  will  thus  be  seen,  that  the  Act  of  1708  gave  to  the  Bank  the 
power  of  unlimited,  and,  within  certain  restrictions,  exclusive 
issue  of  notes.  By  virtue  thereof,  it  became  the  "  manager 
and  regulator  of  the  currenc}" ; "  standing  in  the  relation  to 
paper  that  the  government  did  to  metallic  money.  As  the 
former  was  bound  to  coin  whatever  metal  was  brought  to  it, 
it  became,  by  necessary  inference,  obligatory  on  the  part  of  the 
latter  to  supply  its  notes  upon  all  applications  that  came  within 
the  rules  prescribed  for  making  its  loans.  The  Act  of  1708, 
therefore,  was  that  upon  which  the  Bank,  as  it  subsequently 
existed,  was  based.  It  gave  to  the  monetary  system  of  Eng- 
land its  peculiar  character,  and  was  the  chief  cause  of  the 
ignorance  which  has  prevailed  in  that  country  in  reference  to 
the  laws  or  principles  of  currency.  As  for  nearly  one  hun- 
dred years  after  this  Act  was  passed  the  Bank  enjoyed  almost 
uninterrupted  prosperity,  and  as  during  that  period  very  little 
disturbance  occurred  in  commercial  or  financial  circles,  it  came 


THE  BANK  OF  ENGLAIS-D.  185 

to  be  assumed  that  the  Act,  iii  reference  to  its  objects,  expressed 
the  sum  of  human  wisdom.  No  occasion  arose  for  inquiry  and 
investigation  till  the  phenomena  to  which  it  gave  rise  were 
erected  into  maxims  or  rules,  which  from  that  to  the  present 
time  have  held  unquestioned  sway  over  the  opinions  and  judg- 
ment, not  only  of  the  people  of  England,  but  of  the  world.  In 
1713,  the  charter  of  the  Bank  was  again  extended  till  twelve 
months'  notice  after  August  1,  1742.  In  1716,  it  advanced  to 
government  £2,000,000  ;  and,  in  1721,  £4,000,000.  Of  these 
sums,  £275,027  17s.  10c?.  were  repaid  to  the  Bank;  so  that  its 
share  capital  stood  upon  their  payment  in  1738  at  £9,100,000. 
In  1742,  its  charter  was  extended  till  twelve  months'  notice 
after  August  1,  1764 ;  the  Bank  advancing  to  the  government 
£2,586,800,  increasing  its  capital  to  £11,686,800.  In  1764, 
the  charter  was  extended  till  twelve  months'  notice  "after 
August  1,  1786  ;  in  1781,  till  twelve  months'  notice  after 
August  1,  1812 ;  in  1800,  till  twelve  months'  notice  after  Au- 
gust 1,  1833.  In  1816,  the  Bank  was  authorized  to  increase 
its  capital  from  £11,686,800  to  £14,553,000,  being  an  addition 
of  twenty-five  per  cent  to  its  stock ;  the  increase  being  paid  by, 
and  representing,  a  portion  of  its  accumulated  or  net  earnings, 
which  on  the  29th  February,  1816,  equalled  £8,639,000. 

The  Act  of  1816  provided  for  the  payment  by  the  govern- 
ment of  one  quarter  of  the  advances  made  by  the  former, 
reducing  the  debt  of  the  government  to  it,  to  £11,015,100. 
Although  the  Bank,  for  almost  the  whole  of  the  first  century 
of  its  existence,  was  forbidden  by  its  charter  to  make  any  ad- 
vances to  government,  it  acted  from  the  outset  .as  its  fiscal  agent 
in  collecting  and  disbursing  its  revenues,  and  in  paying  the 
interest  upon  the  public  debt. 

Although  the  government  in  establishing  the  Bank  had  no 
higher  or  broader  purpose  than  temporary  relief  from  a  present 
emergency,  it  was  no  sooner  set  in  motion  than  its  operations, 
whatever  may  have  been  thought  of  its  conduct  in  aftertimes, 
were  immediately  followed  by  the  most  beneficent  results. 
Its  notes  served  for  the  collection  and  disbursement  of  the 
revenues  ;  while  such  as  were  not  requii-ed  for  these  purposes 
were  fully  employed  in  the  distribution  of  merchandise.  It 
laid,  in  fact,  the  foundation  of  that  manufacturing,  commer- 
cial, and  political  supremacy  which  enabled  England  to  wield 


186  HISTORY   OF  MOXETAEY  THEORIES. 

a  paramount  influence  over  the  destinies  of  mankind.     While 
the  paper  issued  by  a  Bank,  that  it  may  return  ^thout  effort 
on  its  part,  should  always  s}-mbolize  merchandise,  it  is  perfectly 
competent  for  a  government,  without  a  dollar  in  its  vaults,  to 
issue  a  currency  which  shalL  by  its  power  of  levying  and  col- 
lecting taxes,  return   to  it   automatically,  after   ha\-ing  per- 
formed all  the  functions  that  could  have   been  performed  by 
coin  in  a  similar  use.     If  its  revenues  equal,  say,  £30.000.000 
annuallv,  and  it  issue  during  the  year  £10,000,000  of  its  notes 
receivable  in  the  payment  of  taxes,  these  would  (the  taxes 
being  certain  to  be  paid)  be  maintained  very  nearly  or  quite 
at  the  par  of  coin,  from  the  uses  they  served.     If  they  woidd 
pay  taxes  equally  with  coin,  they  would  be  preferred  by  tax- 
payers  to    coin.      The   debts   due   from    the    people   to   the 
government  —  and  taxes  that  are  leaded  may  be  called  such  — 
are  a  consideration  which  may  give  its  notes  a  high  value.    Such 
debts  take  the  place  of   merchandise,  which  must  form  the 
basis  and  secm-ity  of  loans  made  by  Banks.     A  considerable 
portion  of  the  issues  of  the  Bank  were  from  the  outset  con- 
stantly  employed  by  the   public  in   manner   described,   and 
returned  to  the  former  as  its  fiscal  agent.     Such  as  were  not 
taken  in  in  this  manner  were  sufficiently  provided  for  by  the 
commercial  paper  discounted  ;  the  deposits  in  the  form  of  coin 
pro\'iding  adequate  reserves.     The  issues  of  the  Bank,  com- 
pared with  their  present  magnitude,  were  for  a  long  time  on  a 
small   scale.      Its  notes  in  circulation,   from   1694   to   1716, 
averaged  only  about  £800,000  annually.     From  1716  to  1770, 
the  annual  average  did  not  much  exceed    £4,000,000;    and 
from  1770  to  the  suspension  of  payments  in  1797,  only  about 
£8,500,000  annually. 

Although  the  Bank,  as  the  issuer  and  manager  of  the  cur- 
rency, stood  out  in  bold  relief,  and  was  for  a  long  time  the 
paramount  financial  power,  it  was  at  no  period  the  only  one. 
As  early  as  1650,  the  merchants  of  London  were  accustomed, 
for  greater  security,  to  deposit  their  surplus  cash  with  the  gold- 
smiths. The  holders  of  such  deposits  as  were  likely  to  re- 
main for  some  time  undrawn  loaned  them,  and  thus  realized 
a  considerable  revenue.  It  was  in  this  way  that  banking  be- 
came a  trade,  and  deposits  were  solicited  in  the  same  manner 
that  customers  are  solicited  by  merchants  at  the  present  time. 


THE   BANK   OF  ENGLAND.  187 

The  receipts  given  for  deposits  would  naturally  circulate  as 
currency.  In  time,  checks  were  drawn  against  them  ;  so  that, 
before  the  establishment  of  the  Bank  of  England,  the  greater 
part  of  the  surplus  cash  of  the  merchants  was  regularly  de- 
posited, and  was  loaned,  drawn  upon,  and  disbursed,  precisely 
as  are  deposits  with  London  bankers  at  the  present  day.  The 
establishment  of  the  Bank  was  violently  opposed  by  the  gold- 
smiths, —  the  bankers  of  that  time,  —  and  undoubtedly  made  a 
serious  inroad  upon  their  operations.  As,  however,  every  great 
institution  like  the  Bank  must  regulate  its  affairs  by  strict 
and  inexorable  rules,  the  mass  of  borrowers  would  prefer  to 
deal  with  private  bankers,  although  paying  a  greater  rate  of 
interest,  from  the  better  accommodations  they  could  secure  ; 
so  that,  during  the  whole  period  of  its  existence,  large  amounts 
of  loans  were  made,  and  paper  discounted,  by  private  bankers, 
whose  issues,  in  form  and  kind,  were  precisely  similar  to  those 
made  by  the  Bank.  After  the  relations  of  the  latter  to  the  gov- 
ernment became  changed,  so  that  it  could  rely  upon  it  as  its 
chief  customer,  the  Bank  naturally  withdrew  from  the  field  of 
discount,  leaving  it  in  the  hands  of  private  parties ;  although 
during  the  period  of  Restriction,  when  it  was  under  no 
obligation  to  take  in  its  notes  in  coin,  it  discounted  business 
paper  very  largely.  It  ceased  to  be,  relatively,  the  great  in- 
strument of  commerce  it  once  was ;  and  was  content  to  loan  its 
deposits  on  the  highest  form  of  security  at  very  low  rates,  cer- 
tain from  their  amount  of  being  constantly  in  the  receipt  of 
very  large  revenues. 

While  the  Bank  has  had  the  competition  of  private  bankers 
during  the  whole  period  of  its  existence,  —  a  competition  so 
effective  as  to  drive  it  in  great  measure  out  of  the  discount 
market  of  the  metropolis,  —  it  has  for  the  last  hundi-ed  years 
had  that  of  country  Banks,  which  at  one  time  rivalled  it  in 
the  amount  of  their  note  circulation,  and,  perhaps,  far  exceeded 
it  in  the  extent  of  their  operations.  By  common  law,  any  per- 
son might  become  a  banker,  —  might  issue  notes  and  receive 
deposits  ;  or,  to  quote  the  language  of  Lord  Liverpool  in 
a  speech  delivered  in  Parliament  in  1826,  when  the  subject 
of  authorizing  joint-stock  Banks  was  under  consideration : 
"  small  tradesmen  — a  cheesemonger,  a  butcher,  or  a  shoemaker, 
may  open  a  Bank.  The  exclusive  privileges  of  the  Bank  of  Eng- 
land do  not  touch  such  cases  ;  but  an  association  of  persona 


188  HISTORY   OF  MONETARY  THEORIES. 

with  sufficient  fortune  to  carrj  on  a  banking  business  with 
security  was  not  permitted."  ^  Lord  Liverpool  seems  to  have 
been  the  first  to  recognize  the  glaring  absurdity  and  disastrous 
consequences  of  allowing  the  issue  of  notes  to  serve  as  money, 
at  the  same  time  restricting  the  number  of  those  who  unite  for 
their  issue  to  six  persons  or  less.  If  any  other  party  than  the 
Bank  were  allowed  to  issue  notes,  the  most  careful  provision 
should  have  been  made  that  "  small  tradesmen,  —  cheese- 
mongers, butchers,  and  shoemakers,"  —  not,  perhaps,  masters  of 
a  shilling,  should  not  exercise  a  function  which  the  greatest 
authorities  on  monetary  science  declare  to  be  a  prerogative  of 
government,  and  which,  certainly  should  not  be  exercised  by 
any  but  those  of  undoubted  substance.  No  other  evidence  is 
needed  of  the  utter  ignorance  and  folly  which  has  uniformly 
characterized  the  legislation  of  Parliament  upon  the  subject  of 
money,  than  that  an  Act  like  that  of  1708  should  have  remained 
untouched  till  1826.  It  was  then  only  so  modified  as  to  allow 
banking  associations  of  more  than  six  members  to  be  formed 
in  England,  for  the  issue  of  notes,  at  places  sixty-five  miles 
distant  from  London. 

Only  a  small  number  of  country  Banks  were  in  existence 
prior  to  the  war  of  American  Independence.  They  increased 
very  rapidly  after  the  conclusion  of  peace.  It  was  at  that 
period  that  those  great  improvements  were  made  in  the 
mechanic  arts  which  so  enormously  increased  the  productive 
industry  of  the  nation,  and  which  enabled  it  to  bring  to  a 
triumphant  conclusion  the  gigantic  struggle  with  France. 
The  creation  of  country  Banks  was,  in  a  great  measure,  due 
to  the  progress  made  in  manufactures  and  commerce.  They 
were  the  natural  result  of  the  increased  wealth,  and  increased 
necessity  for  a  symbolic  currency.  There  were,  according  to 
Thornton,  353  country  Bauks  in  operation  in  1797,  366  in 
1799,  and  386  in  1801.  No  account  of  these  institutions  was 
required  by  government ;  and  there  was  no  means  of  ascer- 
taining the  amount  of  their  note  circulation  till  1804,  when  a 
stamp  duty  was  imposed.  It  was  admitted,  however,  that 
the  amount  of  duties  paid  was  by  no  means  an  accurate 
measure  of  the  amount  of  notes  issued.  It  was  not  until  1808 
that  country  Banks  were  required  to  take  out  licenses.     The 

1  Knight's  History  of  England,  vol.  viii.  p.  200. 


THE    BANK   OF   EXGLAXD. 


189 


number  of  licenses  issued  in  1809  was  702 ;  shelving  an  in- 
crease, in  a  period  of  five  years,  of  316  Banks.  In  1814,  the 
number  of  licenses  taken  out  was  940.  Xo  statements  were 
ever  furnished  of  the  amount  of  capital  invested,  of  deposits 
received,  nor,  till  1833,  of  the  amount  of  notes  issued ;  the 
amount  of  the  latter  till  that  time  being  only  a  matter  of  in- 
ference from  the  number  of  stamps  sold.^ 

Although  the  amount  of  issues  of  London  bankers  and  of 
country  Banks  was  in  great  measure  a  matter  of  conjecture,  it 
is  certain  that  for  nearlv  a  hundred  vears  past  by  far  the  STreater 
portion  of  the  exchanges  were  effected  by  them.  In  1795,  the 
average  amount  of  commercial  bills  under  discount  at  the 
Bank  equalled  only  £2,996,000.  The. average  amount  under 
discount  in  the  whole  country  must  have  been  tenfold  greater. 
In  1796,  the  bills  under  discount  averaged  £8,505,000.  The 
amount  gradually  increased  after  the  suspension,  reaching  as 
high  as  £20,070.^000,  in  1810.  The  Bank  began  to  withdraw 
from  this  kind  of  business  so  soon  as  it  was  seen  that  prepara- 
tions must  be  made  to  resume.- 

As  the  notes  and  credits  issued  by  the  bankers  and  country 
Banks  exerted,  in  ratio  to  their  amount,  precisely  the  same 
influence  over  the  operations  of  production  and  trade  as  those 
of  the  Bank  of  England,  and  as  we  are  in  great  measure  ig- 


^  Statement  showing  the  number  of  licenses  issued  to  country  Banks,  and 
the  number  of  commissions  of  bankruptcy  issued  against  them,  from  1809  to 
1832,  inclusive. 


1 
No  of  Com- 

1 

i 

Xo.  of  Com- 

Tears. 

No.  of  licenses 

missions  of 

1 

1              .rr^ , 

Xo.  of  licenses 

missions  of 

granted. 

Bankruptcy 

i        Years. 

granted. 

Bankruptcy 

i&sned. 

issued. 

1809 

702 

i 

,         1821 

781 

10 

IMO 

782 

20        1 

1        1822 

776 

9 

l&ll 

779 

4        1 

i        1823 

779 

9 

1812 

825 

17 

;        1824 

788 

10 

1813 

922 

8 

1        1825 

797 

37 

18U 

940 

27 

1826 

809 

43 

1815 

916 

25 

1827 

665 

8 

1816 

831 

37 

1828 

672 

3 

1817 

752 

3 

1829 

677 

3 

1818 

765 

3 

1830 

671 

14 

1819 

787 

13 

1831 

641 

1820 

769 

■i 

18.32 

636 

-  Statement  showing  the  average  note  circulation  of  the  Bank  of  England 
and  of  the  country  banks  ;  deposits  in  the  Bank  of  England ;  the  amount  of 


190 


HISTORY  OF   MOXETAEY  THEORIES. 


norant  of  the  amount  of  the  former,  compared  with  those  of 
the  latter,  it  is  impossible  to  say  how  much  of  the  aberration  or 
disturbance  occurring  from  time  to  time  in  commercial  affairs 
was  due  to  the  one,  and  how  much  to  the  other.  It  was 
possible  that  the  greatest  degree  of  disturbance  may  have 
arisen  almost  wholly  from  the  action  of  bankers  and  country 

commercial  bills  under  discount  by  the  bank ;  the  amount  of  private  deposits 
held  by  the  bank  ;  and  the  amount  of  loans  by  the  bank  upon  public  and  private 
securities  from  1814  to  1832  inclusive. 

(000s  omitted;  thus,  £1,000  =  £1,000,000.) 


"oi 

»^ 

iSi 

2^ 

S^ 

II 

s  k 

§g 

§1 
1« 

s 

3 

3« 

1 

1  = 

1- 

•al  . 

a 

0  a 

X 

~c^ 

■6% 

§,2*3 

5  o 

iti 

11- 

c  "•   . 

<8g 

Ills 

1= 

Hi 

c  as 

|5-c 

1814 

£24,801 

£22,700 

£47,501 

£13,602 

£13,285 

£2,374 

£29,316 

£15,865 

1815 

27,261 

19,011 

46,272 

12,199 

14,967 

1,690 

25,858 

18,852 

1816 

27,013 

15,096 

42,109 

12,122 

11,416 

1,333 

22,761 

17,676 

1817 

27,397 

15,894 

43,291 

9,954 

3,960 

1,672 

26,328 

7,123 

1818 

27,775 

20,507 

48,282 

7,962 

4,326 

1,640 

27,086 

4,552 

1819 

25,227 

15,701 

40,928 

6,358 

6,615 

1,790 

24,387 

7,710 

1820 

23,509 

10,576 

34,085 

4,256 

8,883 

1,326 

20,444 

4,671 

1821 

22,971 

8,256 

31,227 

5,720 

2,676 

.   1,326 

15,881 

3,853 

1822 

18,172 

8,416 

26,588 

6,644 

3,366 

1,373 

13,073 

3,558 

1823 

18,176 

9,920 

28,096 

7,504 

3,123 

2,321 

12,750 

5,142 

1824 

19,927 

12,831 

32,758 

9.876 

2,369 

2,369 

14,495 

6,367 

1825 

26,069 

14,980 

41,049 

8,299 

4,941 

2,607 

18,431 

6,597 

1826 

23,515 

8,656 

32,171 

7,067 

4,908 

3,322 

19,143 

9,857 

1827 

22,318 

9,985 

32,303 

8,426 

1,240 

3,931 

18,494 

4,117 

1828 

21,668 

10,121 

31,789 

9,699 

1,167 

6,701 

20,501 

3,492 

1829 

19,708 

8,130 

27,838 

9.294 

2,250 

5,217 

19,904 

5,118 

1830 

20,757 

7,841 

28,698 

11,181 

919 

5,562 

20,475 

3,909 

1831 

19,019 

7,914 

2(3,933 

10,141 

1,633 

6,202 

18,992 

6,664 

1832 

18,185 

8,221 

26,306 

9,607 

•  •  • 

19,665 

5,992 

Statement  showing  the  amount  of  commercial  bills  under  discount  at  the  Bank 

from  1795  to  1813,  inclusive. 


Tears. 

Amounts. 

Years. 

Amounts. 

Tears. 

Amounts. 

1795 
1796 
1797 
1798 
1799 
1800 
1801 

£2,996,000 
3,505,000 
6,350,000 
4,490.000 
5.40:5,000 
6,401,000 
7,906,000 

1802 
1803 
1804 
1805 
1806 
1807 

£7,523,000 
10,747,000 
9,982,000 
11,;365,000 
12,380,000 
13,484,000 

1808 
1»09 
1810 
1811 
1812 
1813 

£12,951,000 
16,175.000 
20,070,000 
14,355,000 
14,291,000 
12,330,000 

I 


SUSPENSION  OF  THE  BANK   OF  ENGLAND.  191 

Banks,  for  which  the  Bank  of  England  was  in  no  way  to  be 
censured ;  or  its  action  may  have  produced  great  commercial 
convulsions,  for  which  bankers  and  country  Banks  were  by  no 
means  chiefly  responsible.  The  action  of  both,  however,  is 
always  to  be  taken  into  account,  in  every  attempted  explana- 
tion of  a  great  rise  in  prices,  of  great  speculative  movements, 
and  of  great  financial  revulsions,  and  in  applying  the  proper 
remedy.  Whichever  be  at  fault,  the  cause  will  always  be 
found  in  a  nut-shell :  in  an  issue  of  money,  —  of  notes  and  cred- 
its, which  act  powerfully  upon  prices,  for  the  reason  that  they 
do  not  represent  merchandise,  but  debt.  Englishmen  have  been 
taught,  that  only  such  paper  is  deserving  the  name  of  money 
as  displaces  a  corresponding  amount  of  coin  ;  and  that  the 
only  paper  that  effects  such  displacement  is  bank-notes.  The 
moment  there  is  a  disturbance,  or  any  great  movement  in 
financial  affairs,  they  instantly  begin,  for  a  proper  explanation 
or  remedy,  to  pore  over  the  tables  of  the  amount  of  issue  of 
Bank  of  England  notes.  They  might  as  well  infer  the  wealth 
of  the  nation  from  the  petty  sums  hoarded  in  its  vaults,  or  meas- 
ure the  volume  and  effect  of  an  Amazon  or  a  Niagara  by  the  con- 
tracted and  noiseless  flow  of  their  Thames.  As  the  action  of 
the  private  Banks  and  bankers  does  not  enter  into  their  cal- 
culation, they  cannot  get  rid  of  the  conviction  that  the  quan- 
tities with  which  they  are  dealing  make  up  only  a  small  part 
of  those  necessary  to  a  proper  equation,  —  to  a  proper  under- 
standing of  the  situation.  In  the  uncertainty  as  to  the  future, 
all  monetary  and  commercial  operations  are  brought  to  a 
dead  stand,  to  resume  their  wonted  movement  only  when 
time  shall  have  fully  revealed  the  extent  of  their  conjectures 
and  fears. 

By  the  terms  of  its  charter  the  Bank  was  forbidden  to 
make  loans  to  the  government  without  the  sanction  of  Parlia- 
ment, for  fear  that  it  might  at  some  time  become  involved  in 
the  precise  condition  in  which  it  found  itself  in  1795  and  for  a 
long  time  thereafter.  It  had,  however,  from  a  very  early 
period,  been  in  the  habit  of  making  advances  on  such  Treas- 
ury bills  of  exchange  as  were  made  payable  at  it.  These  ad- 
vances, or  "  discounts,"  as  they  may  be  more  properly  termed, 
were  usually  for  small  sums  only.  Such  transactions  were 
made  subjects  of  complaint  on  the  part  of  the  Bank,  if  the 
sums  so  advanced  reached  at  any  one  time  £50,000.     During 


192  HISTOEY   OF   MOXETAHY  THEORIES. 

the  American  War  of  Independence,  however,  such  advances 
rose  as  high  as  .£150,000.  As  grave  doubts  had  always  existed 
as  to  the  legality  of  such  transactions,  the  Bank  determined  to 
apply  for  an  Act  of  Indemnity  for  the  past,  and  for  permission 
to  make  such  advances  in  the  future  to  a  limited  amount. 
Mr.  Pitt,  then  at  the  head  of  the  government,  brought  in  a 
bill  for  this  purpose,  with  an  understanding,  as  it  was  claimed, 
on  the  part  of  the  Bank,  that  such  advances  for  the  future 
were  not  to  exceed  £50,000,  or  £100,000  at  most,  at  any  one 
time.  Mr.  Bosanquet,  the  President  of  the  Bank,  intrusted 
on  its  part  with  the  matter,  being  about  to  go  out  of  office, 
left  it  mainly  in  charge  of  Mr.  Pitt ;  who,  probably  foreseeing 
the  advantage  to  be  gained  thereby,  pushed  through  the  bill, 
lea^dng  out  the  limitation  clause  altogether.  By  its  passage, 
he  had  now  the  Bank,  and  with  it  the  whole  monetary  power 
of  the  kingdom,  under  his  control,  as  there  was  no  limit  to 
the  price  at  which  he  could  sell  the  securities  of  the  govern- 
ment. There  was  hardly  any,  consequently,  to  the  means  at  his 
command.  He  armed  all  Europe  against  his  great  enemy,  and 
waged,  while  he  lived,  by  no  means  an  unequal  contest.  If 
worsted  on  land,  England  remained  mistress  of  the  seas ;  mak- 
ing good,  in  the  end,  the  prediction  of  Cicero  in  reference  to  the 
struggle  between  Pompey  and  Csesar :  "  Qiii  mart  potitur, 
eum  reriim  potiri"  The  magnitude  of  his  combinations,  and 
the  vast  power  he  was  enabled  to  wield  through  the  Bank,  are 
still'  the  wonder  and  admiration  of  the  world.  The  Bank 
Directors,  however,  were  by  no  means  the  willing  victims  and 
slaves  of  their  imperious  master.  In  addition  to  the  drain 
upon  the  country  for  military  subsidies,  large  amounts  of  bul- 
lion were  sent  abroad  for  other  purposes :  the  amount  of  ex- 
ports in  1793  being  £2,715,232  ;  in  1794,  £8,335,592;  and  in 
1795,  £11,040,236  :  the  total  for  the  three  years  equalling 
£22,091,060.  In  addition  to  the  exports  of  bullion,  the 
amount  of  Treasury  biUs  made  payable  or  negotiated  at  Bank 
increased  enormously.  The  demands  of  merchants  and  man- 
ufacturers were  equally  pressing  with  those  of  the  government. 
So  clamorous  were  the  calls  for  accommodation,  that  the  Direc- 
tors, in  the  latter  part  of  1794,  represented  to  Mr.  Pitt  the 
condition  of  aifairs,  and  the  dangers  which  threatened.  Early 
in  1795  they  adopted  a  resolution,  that,  in  view  of  a  loan  of 
£6,000,000  to  be  raised  for  foreign,  and  one  of  £18,000,000 


SUSPENSION   OF   THE  BANK   OF  ENGLAND.  193 

for  home  purposes,  the  Chancellor  of  the  Exchequer  be  re- 
quested to  make  his  financial  arrangements  for  the  year 
without  aid  from  the  Bank  ;  and  that  they  would  make  no 
advances  upon  Treasurj^  bills,  exceeding,  at  any  one  time,  the 
sum  of  £500,000. 

Although  Mr.  Pitt  promised  a  ready  compliance  with  the 
requests  of  the  Directors,  he  acted  only  in  reference  to  his 
own  necessities ;  and  notwithstanding  their  remonstrance, 
he  wrung  from  the  Bank,  in  August,  1795,  the  sum  of 
£2,000,000.  In  the  mean  time,  the  Bank,  in  face  of  the  loans  it 
was  called  upon  to  make,  as  well  as  others  that  were  proposed, 
and  which  it  might  have  to  aid  in  making,  largely  increased 
its  issues  of  notes,  although  at  the  same  time  there  was  a  con- 
stant and  heavy  outflow  of  specie.     Its  notes,  wliich  in  August, 

1794,  stood  at  £10,000,000,  reached  £14,000,000  in  February, 

1795,  the  increase  being  made  chiefly  in  payment  of  bills  drawn 
upon  the  Treasury  in  behalf  of  foreign  governments.  The 
point  was  already  reached  at  which  it  could  consult  its  own 
safety  only  at  the  cost  of  declaring  government  bankrupt. 

As  the  outflow  of  specie  continued  to  increase  in  force,  its 
Directors,  in  October,  1795,  again  made  a  formal  representation 
to  the  government  of  their  apprehensions  growing  out  of  the 
condition  of  affairs,  and  the  absolute  necessity  of  a  reduction 
in  the  amount  of  their  advances.  They  called  its  attention 
to  the  fact  that  the  representations  made  at  the  commence- 
ment of  the  year  as  to  the  dangers  likely  to  arise  from  for- 
eign loans  were  being  fully  realized,  and  that  numerous 
pajnnents  were  yet  to  be  pro-^dded  for.  They  showed  the 
market  price  of  gold  to  have  risen  to  a  considerable  premium  ; 
and,  with  the  extraordinary  call  for  it  which  had  caused  the 
rise,  they  declared  they  could  make  no  further  advances.  The 
rumors  that  new  loans  were  contemplated  were  at  first  denied 
by  Mr.  Pitt.  At  subsequent  interviews,  however,  he  stated 
to  the  Directors  that  a  new  loan  of  £2,000,000  to  the  Austrian 
government  would  be  of  great  aid  to  the  common  cause  of 
which  he  was  the  master-spirit,  the  object  of  which  was  to 
humble  the  power  and  ambi  ion  of  France.  He  stated,  at  the 
saiue  time,  that  if  such  a  loan  would  hazard  the  welfare  or 
stability  of  the  Bank,  all  '  nought  of  it  should  be  abandoned. 

As  the  Bank  had  in  gi-eat  measure  exhausted  its  means  by 
its  loans  to  the  goverDuient,  which  were,  necessarily,  very 

13 


194  HISTORY   OF   MOXETARY  THEORIES. 

largely  drawn  in  coin,  it  had  no  other  alternative  than  tc 
reduce  its  accommodations  to  the  public.  Its  Directors  accord 
ingly  announced,  that  such  advances  as  they  could  make,  day 
by  day,  should  be  divided  proportionably  among  the  appli- 
cants. This  determination  caused  great  alarm  and  distress  in 
commercial  circles.  In  spite,  however,  of  all  expedients,  mat- 
ters continued  to  go  from  bad  to  worse ;  the  Bank,  in  the 
mean  time,  remonstrating  in  the  strongest,  and  Mr.  Pitt  always 
replying  in  the  most  compliant  terms.  On  the  14tli  of  February, 
1796,  the  Directors  formally  represented  to  Mr.  Pitt,  "  That  it  is 
the  opinion  of  this  Court  [of  Directors,]  founded  on  its  experi- 
ence of  the  effect  of  the  late  Imperial  loan,  that  if  any  further 
loan  or  advance  of  money  to  the  Emperor  [of  Germany],  or  other 
foreign  state,  should,  in  the  present  state  of  affairs,  take  place, 
it  would  in  all  probability  prove  fatal  to  the  Bank  of  England. 
The  Court  of  Directors,  therefore,  do  most  earnestly  depre- 
cate the  adoption  of  any  such  measure  ;  and  they  solemnly 
protest  against  any  responsibility  for  the  calamitous  conse- 
quences that  may  follow  therefrom."  Mr.  Pitt  replied  in  his 
usual  strain,  that  no  further  loan  should  be  made  without 
communicating  with  them ;  that  he  saw  no  reason  for  their 
apprehension  ;  and  that  their  representations  must  have  been 
made  in  a  moment  of  needless  alarm. 

As  the  stringent  measures  adopted  by  the  Bank,  for  the  pur- 
pose of  contracting  its  issues,  produced  great  distress  among 
all  classes,  various  propositions  were  made  for  relief;  and  among 
them,  that  a  Committee  of  twenty-five  members  be  appointed 
by  Parliament,  authorized  to  issue  notes  payable  six  months 
after  date,  bearing  interest  at  the  rate  of  1]  pence  daily  per 
.£100,  upon  receiving  their  value  in  gold  and  silver.  Bank  of 
England  notes,  or  bills  of  exchange  having  not  more  than  three 
months  to  run.  Such  a  suggestion  was  made,  probably,  in 
consequence  of  an  issue  of  Exchequer  bills  for  th  i  ;  'urpose  of 
arresting  the  commercial  and  fins  iciai  punic  of  1793.  All  such 
propositions,  however,  came  to  -'^bing.  lu  ^be  mean  tin 
Mr.  Pitt  applied,  in  July.  1790,  fo  .  u  of  .£800,Ui;0  on  Tre? 

ury  bills  (the  Bank  being  already  n  a  Lvance  on  account  of  .i    'i 
bills  to  the  amount  of  over   JEUOO.OOO);  and  for  a  similar 
sum  in  August.     The  i>ireotore  agreed  to  advance  the  firs 
sum,  but  refused  to  advance  ihe   econd.     Mr.  Pitt  replied,  that 
without  the  second  the  fii'st  Avould  be  o    uo  use  to  him,  and 


SXTSPENSTON"  OF   THE  BANK  OF  ENGLAND.  195 

thev  were  driyen  most  reluctantly  to  make  both  loans.     They 
again  addressed  an  earnest  remonstrance  to  the  government, 
and  declared  that  they  yielded  to  its  demands  only  from  fear 
of  the  consequences  that  would  follow  a  refusal.     "  They  con- 
sented," they  said,  "  to  this  measure,  in  a  firm  reliance  that 
the  repeated  promises,  so  frequently  made  to  them,  that  the 
advances  on  the  Treasury  bills  should   be  completely  done 
away,  may  be  actually  fulfilled  at  the  next  meeting  of  Parlia- 
ment, and  the  necessary  arrangements  taken  to  prevent  the 
same  from  ever  happening  again  ;  as  they  conceive  it  to  be  an 
unconstitutional  mode  of  raising  money,  what  they  are  not 
warranted  by  their  charter  to   consent  to,  and   an   advance 
always  extremely  inconvenient  to  themselves."     The  immedi- 
ate response  to  this  remonstrance,  so  pertinent  and  reasonable, 
was  a  fresh  demand  upon  the  Bank  for  ,£2,750,000,  on  the 
security  of  the  malt  and  land  taxes  ;  which  was  granted  upon 
condition  that  the  advances  on  the  Treasury  bills,  then  amount>- 
ing  to  £1,513,345,  were  to  be  paid  out  of  it.    Mr.  Pitt  pocketed 
the  new  loan,  without  paying  off  any  advances  that  had  been 
made  on  the  Treasury  bills.     The  Directors  again  demanded 
payment ;    as  the  advances  on   such   bills  had   increased   to 
.£1,554,635,   and   would,   in   a    few    days,   be    increased    to 
X  1,854,635.     :Mr.  Pitt  was  full  of  excuses  for  non-payment, 
made  abundant  promises  for  the  future  ;  but  hinted  at  the  same 
time,  that  a  large  amount  of  bills,  estimated  at  £700,000,  had 
come  in  from  San  Domingo.     He  further  hinted,  at  the  same 
time,  that  he  should  presently   want    £200,000  for  Ireland. 
All  that  the  Directors  could  do  was  to  repeat  their  remon- 
strances, and  picture  the  ruin  which  now  stared  them  in  the  face. 
Pitt,  in  fact,  knew  no  law  but  that  imposed  upon  him  by  the 
situation  in  which  he  was  placed.  With  vast  military  operations, 
of  which  he  was   the  centre,  he  would   have   been   in    the 
greatest  straits  for  money  with  tenfold  the  advances  that  were 
made.     It  was  a  struggle  which  of  the  two  mighty  geniuses 
that  were  brought  into  collision  should  become  master  of  the 
destinies  of  the  world.     In  all  this  Pitt  simply  impersonated 
the  spirit  of  the  nation,  then  roused  to  a  pitch  of  fervor  and 
aetermination  which  perhaps  occurs  but  once  in  a  nation's  his- 
tory.    It  was  a  struggle  for  every  thing  the  preservation  of 
which  gave  value  to  life.      It  was  a  struggle  which  absorbed 
lie  will  of  the  nation,  and  in  which  the  Bank  Directors,  though 


196  HISTOET   OF  MOXETAET  THEORIES. 

foreseeing  certain  ruin  in  their  path,  stood  ready  to  sacrifice 
themselves  upon  what  they  believed  to  be  the  altar  of  their 
country's  good.  The  attitude  of  England  to  the  French  republic 
-was  in  every  respect  selfish  and  unjustifiable  ;  but  when  the 
liberties  of  France  were  surrendered  to  a  remorseless  and 
unprincipled  despot,  the  only  course  for  England  was  to  fight 
the  battle  to  the  bitter  end.  Her  crowning  triumph  would 
have  been  whoUy  impossible  but  for  the  aid  furnished  by  the 
Bank.  By  means  of  it.  she  availed  herself  of  the  whole  financial 
power  of  the  nation  ;  and  was  enabled  to  carr}-  on  for  twenty 
years  a  struggle  in  which,  without  the  Bank,  she  must  have 
been  ignominiously  driven  from  the  field. 

The  action  of  the  Bank  in  restricting  its  issues,  to  which  it 
rioidly  adhered  in  endeavoring  to  save  itself  from  what  ap- 
Deared  to  be  nothing  less  than  certain  destruction,  precipitated 
the   crisis  which  was  impending,  and  which   could  not  then 
probablv  have  been  avoided.     In  a  period  of  eighteen  months, 
it  reduced  its  circulation  from  £14.017,510  to  ^£8,640,2.50,  —  a 
reduction  of  nearly  one-half.     A  wide-spread  panic  was  the 
natural  result  of  the  unexampled  distress  which  was  caused, 
and  by  which  all  classes  were  alike  affected,  and  greatly  in- 
creased the  run  for  coin.     The  Directors,  now  fully  compre- 
hending the  situation,  sent,  on  the  21st  of  February,  1797,  a 
deputation  to  Mr.  Pitt  to  ask  him  how  much  longer  he  thought 
the  Bank  should  continue  to  pay  specie,  and  when  he  should 
think  it  advisable  for  him  to  interfere.     Mr.  Pitt  replied  that, 
as  a  preliminary  step,  the  affairs  of  the  Bank  should  be  exam- 
ined by  a  secret  committee  ;  to  which  request  the  Directors 
promptly  assented.     The  specie   on  hand   on  that   day  was 
reduced  to  £1,272,000.     It  was  evident  that  it  could  go  on 
no  longer ;  and,  on  the  25th  of   February,  a  meeting  of  the 
Cabinet  Avas  held,  and  an  "  Order  in  Council "  issued,  direct- 
ing the  Bank  to  suspend  all  pa\Tnents  in  specie  until  the  sense 
of  Parliament  should  be  known.     Accompanpng  this  order 
was  a  statement  of  the  Directors,  that  the  affairs  of  the  Bank 
were  in  a  prosperous  condition,  and  that  it  was  possessed  of 
ample  means  for  the  ultimate  payment  of  all  its  liabilities. 
Its  specie  was  reduced,  on   the   day  of   the   suspension,  to 
£1,086,000.     AYith  the  announcement  of  the  suspension,  the 
panic  instantly  subsided.     The  relief  was  immediate  and  com- 
plete.    The  merchants  and  bankers  of  London,  immediately 


SUSPENSION   OF   THE  BANK  OF    ENGLAND.  197 

upon  the  announcement,  lield  a  meeting,  at  Tvhich  they  re- 
solved, "  That,  being  highly  sensible  how  necessary  the  pres- 
ervation of  public  credit  is  at  this  time,  we  do  most  readily 
declare,  that  we  will  not  refuse  to  receive  bank-not€s  in  pav- 
ment  of  any  sum  of  money  to  be  paid  us ;  and  we  will  use  our 
utmost  endeavors  to  make  all  our  pa\-ments  in  the  same  man- 
ner."    This  resolution  was  subsequently  signed  by  nearly  four 
■  thousand  individuals  and  firms.    The  Bank  immediately  began 
to  expand  its  issues  ;  increasing  them  within  one  week  bv  the 
sum  of  nearly  ^2,000.000.     Confidence  being  fully  restored, 
a  return  flow  of  specie  into  it  immediately  set  in ;  for  the  run 
upon  it.  for  some  time  previous  to  the  suspension,  was  not  caused 
by  the  foreign  demand,  but  by  hoarding  in  consequence  of  the 
distrust  which  had  prevailed.     The  foreign  exchanges  had  for 
some  time  previous  to  the  suspension  been  in  favor  of  the 
country,  and  continued  in  its  favor  for  a  considerable  period 
thereafter.     An  Act  of  Parliament  was  speedily  passed,  "  for 
continuing  for  a  limited  time  the  restriction  contained  in  the 
Minute  of  Council  for  the  25th  of  February.  1797,  on  payment  of 
cash  by  the  Bank."  By  this  Act  the  Bank  Dii-ectors  were  indem- 
nified for  having  complied  with  the  Order  in  Council.     They 
were  forbidden  to  pay  cash,  except  in  sums  under  20.s. ;  but,  if 
any  person  lodged  specie  with  them,  he  might  be  repaid  ia 
kind  to  the  extent  of  three-fourths  of  the  sum  deposited,  pro- 
vided such  sum  were  not  less  than  £500.     Pavments,  in  the 
notes  of  the  Bank  were  to  be  deemed  as  payments  in  specie,  if 
accepted  as  such.     The  notes  were  also  to  be  received  in  pay- 
ment of  taxes  :  and  no  debtor  was  to  be  held  to  special  bail,  un- 
less the  affidavit  stated  that  pa vment  in  bank-notes  had  not  been 
offered.     The  Act  was  continued  in  force  till  June  24th  of  the 
same  year.     The  Bank  was  also  at  the  same  time  authorized  to 
issue  notes  under  £5.  Within  six  months  after  the  suspension, 
it  held  £4.089.620  in  specie  and  bullion  against  £1.086,000 
held   by   it   on   the  day  of  the  suspension.     On  the  2Sth  of 
February.  179 S.  one  year  after  the  suspension,  the  amount  of 
specie  held  equalled  £5.828,940.     The  amount  of  notes  out- 
standing on  the  day  of  the  suspension  was  £8,640,250.     The 
amount  on  the  31st  of  August,  1797,  was   £11,114.130  ;  on 
the   28th  of  February,  1798,  £13,095,320:   and  on  the  28th 
of  February,  1799,  two  years  after  suspension,  £12,959.800. 
These  changes  were  a  decisive  proof  of  the  healthy  condition 


198  HISTORY    OF    MONETARY  THEORIES. 

of  production  and  trade,  and  the  ease  with  which  they  adjusted 
themselves  on  a  sound  basis  the  moment  apprehension  and 
uncertainty  as  to  the  future  were  removed.  Nothing  coukl  have 
been  more  admirable  than  the  conduct  of  the  Bank.  Relieved 
of  the  necessity  of  paying  specie,  it  increased  in  one  year  its 
coin  reserves  in  ninefold  greater  ratio  than  its  liabilities  in  the 
form  of  notes.  It  had  seldom  or  never  been  in  a  stronger 
position  than  it  was  during  the  two  years  after  its  suspension ; 
and  early  in  1799,  it  signified  its  ability,  and,  with  the  consent  of 
government,  its  willingness,  to  resume  payment.  But  the 
latter,  influenced  by  other  considerations  than  those  which 
relate  to  commercial  and  mercantile  affairs,  replied  that  it  was 
inexpedient  to  resume  in  the  present  state  of  the  country. 
With  the  suspension  of  specie  pajanents  came  the  abundant 
harvests  of  1797  and  1798.  Wheat  fell  to  41s.  the  quarter  in 
January,  1799.  The  seasons  of  1799  and  1800  were  unpropi- 
tious,  and  the  price  of  wheat  rose  in  May  of  the  first  year 
to  61s.  the  quarter ;  and,  at  the  end  of  the  year,  to  94s.  2d.  the 
quarter.  In  June,  1800,  it  rose  to  134s.  the  quarter ;  and,  in 
March,  1801,  to  lo6s.  the  quarter.  The  market  price  of 
gold,  however,  remained  at  the  mint  price,  X3  17s.  6(?.,  till 
June,  1800,  when  the  price  of  foreign  gold  suddenly  rose  to 
48.  Qd.  the  ounce.  Early  in  1801,  the  value  of  domestic  coins 
had  risen  Is.  per  ounce ;  and  foreign  exchange,  payable  in 
bank-notes,  particularly  in  Hamburg,  was  depressed  14  per 
cent  below  par.  The  cost  of  remitting  gold  from  London  to 
Hamburg  at  the  time  did  not  exceed  7  per  cent.  The  differ- 
ence between  the  rate  of  exchange  and  the  cost  of  remitting 
specie  could  only  result  from  depi-eciation  of  the  currency. 

The  restriction  of  specie  payments  had  been  continued  by 
various  acts,  the  last  of  which  was  to  expire  within  six  months 
after  a  definitive  treaty  of  peace  (with  France)  was  signed. 
This  was  concluded  at  Amiens,  on  the  27th  of  March,  1802. 
Although  the  Bank  at  that  time  signified  its  readiness  to  re- 
sume, the  restriction  was  continued  till  March  1st,  1803. 
The  price  of  gold,  which  averaged  <£4  5d.  the  ounce  for  1801, 
and  <£4  4s.  the  ounce  for  1802,  fell  in  1803  to  £4  the  ounce, 
and  continued  at  that  figure  till  1809,  when  it  rose  to  <£4  lO^. 
the  ounce,  or  to  a  premium  of  13|  per  cent ;  the  restriction 
having  been,  of  course,  continued  for  this  period.     The  sudden 


EEPOKT   OF   THE   BULLION   C0]SOnTTEE. 


199 


rise  in  1809  caused  great  alarm  ;  and,  early  in  1810,  a  Committee 
was  moved  in  the  House  of  Commons  by  Mr.  Francis  Horner, 
"  to  inquire  into  the  cause  of  the  high  price  of  gold  bullion,  and 
to  take  into  consideration  the  state  of  the  circulating  medium 
and  of  the  exchanges  between  Great  Britain  and  foreign 
parts."  ^  The  Committee  consisted  of  twenty-one  members, 
among  whom  were  those  most  distinguished  in  the  kingdom 
for  their  experience  and  knowledge  in  monetary  and  commer- 
cial affairs.  Among  these,  in  addition  to  the  chairman,  were 
Alexander  Baring,  Henry  Thornton,  William  Huskisson,  and 
Spencer  Perceval,  then  Chancellor  of  the  Exchequer.  The 
Committee,  in  the  course  of  their  inquiries,  examined  thirty 
persons,  most  of  them  eminent  merchants  and  bankers 
and  thoroughly  familiar  with  all  the  operations  of  business 
and  trade.  They  submitted  their  Report  on  the  8th  of  June, 
1810 ;    but    this  was  not  considered    in   Parliament  till  the 

1  Statement  showing  the  average  market  price,  in  bank-notes,  of  bullion,  and 
the  average  value  and  average  percentage  of  depreciation  of  the  notes  of  the 
Bank  of  England,  in  each  year  from  1797  to  1821  inclusive. 


Years. 

Average  value  of  gold 
in  bank-notes. 

Average  percentage 
of  the  value  of  bank- 
notes. 

Average  depreciation 
per  cent. 

£      s.       d. 

£         s.      d. 

£       d.       s. 

1797 

3      17      lOi 

100       0       0 

Nil. 

1798 

3   17   m 

100      0      0 

Nil. 

1799 

8   17   m 

100      0      0 

Nil. 

1800 

3      17      lOi 

100      0      0 

Nil. 

1801 

4        5        0 

91     12      4 

8        7       8 

1802 

4       4       0 

92     14      2 

7        5      10 

1803 

4       0       0 

97      6    10 

2      13       2 

1804 

4       0       0 

97      6    10 

2      13       2 

1805 

4       0       0 

97      6    10 

2      13       2 

1806 

4       0       0 

97      6    10 

2      13       2 

1807 

4       0       0 

97      6    10 

2      13        2 

1808 

4       0       0 

97      6    10 

2      13       2 

1809 

4        5       0 

91     12      4 

8       7        8 

1810 

4      10       0 

86     10      6 

13       9       6 

1811 

4       4       6 

92      3      2 

7      16      10 

1812 

4      15       6 

79      6      3 

20      14       9 

1813 

5        1        0 

77      2      0 

22      18       0 

1814 

5       4       0 

74     17      6 

25        2       6 

1815 

4      13        6 

83      5      9 

16      14       3 

1816 

4      13       6 

83      5      9 

16      14       3 

1817 

4       0       0 

97      6    10 

2      13       2 

1818 

4       0       0 

97      6     10 

2      13       2 

1819 

4        1        6 

95    11      0 

4       9       0 

1820 

3      19      11 

97      8      0 

2      12       0 

1821 

3      17      10^ 

100      0      0 

Nil. 

The  highest  point  to  which  gold  rose  was  £o  lOs.  the  ounce,  on  the  Gth  of 
August,  1813.    The  premium  equalled  29  per  cent. 


200  HISTORY  OF  MONETARY  THEORIES. 

following  year.  It  reported  that  the  price  of  gold  bullion, 
which  by  the  regulations  of  His  Majesty's  mint  was  £3  lis.  lO^d. 
per  ounce  of  standard  fineness,  was  during  the  years  1806, 
1807,  and  1808,  as  high  as  <£4  in  the  market.  Toward  the 
close  of  the  year  1808,  it  began  to  advance  very  rapidly,  and 
continued  very  high  during  the  year  1809  ;  the  market  price  of 
standard  gold  in  bank-notes  fluctuating  from  £4:  9s.  to  j£4  12s. 
the  ounce  ;  the  market  price  at  £4. 10s.  the  ounce  being  about 
15^  per  cent  above  the  mint  price.  The  Committee  then  pro- 
ceeded to  inquire  as  to  the  cause  or  reasons  for  such  advance ; 
and  ascribed  it,  in  the  conclusion  of  their  Report,  to  an  excessive 
issue  of  notes  by  the  Bank.  The  Bank,  on  the  other  hand, 
contended  that,  from  the  manner  in  which  it  conducted  its 
business,  —  that  is,  as  it  only  discounted  paper  based  upon 
and  representing  actual  mercantile  transactions,  and  payable 
within  short  and  fixed  periods,  —  the  currency  could  not  be 
in  excess.  It  was  contended,  also,  by  the  public  more  than 
by  the  Bank,  that  the  price  of  gold  had  risen  in  consequence 
of  the  excessive  demand  for  it  upon  the  Continent ;  that  the 
value  of  its  notes  was  not  depreciated.  The  Committee, 
however,  assumed  that  its  notes  were  depreciated ;  and  that  the 
only  check  upon  over-issues  was  a  liability  for  the  redemption 
of  its  notes  upon  demand  ;  or  that  its  issues  should  be  made  in 
reference  to  the  state  of  foreign  exchange ;  and  that,  specie 
payments  being  forbidden,  the  Bank  was  bound  to  conduct  its 
operations  in  reference  to  the  latter  test  or  standard. 

"  It  is  important,"  said  the  Committee,  "  to  observe,  that  when  the 
Bank  was  bound  to  answer  its  notes  in  specie  on  demand,  the  state 
of  foreign  exchanges  and  the  price  of  gold  did  most  materially 
influence  its  conduct  in  the  issue  of  its  notes,  though  it  was  not  the 
practice  of  the  Directors  systematically  to  watch  either  the  one  or 
the  other.  So  long  as  gold  was  demandable  on  their  paper,  they 
were  speedily  apprised  of  a  depression  of  the  exchange,  and  a  rise 
in  the  price  of  gold,  by  a  run  upon  them  for  that  article.  If  at 
any  time  they  incautiously  exceeded  the  proj)er  limit  for  their  ad- 
vances and  issues,  the  paper  was  quickly  brought  back  to  them  by 
those  who  were  tempted  to  protit  by  the  market  price  of  gold  or 
by  the  rate  of  exchange.  In  this  manner,  the  evil  soon  cured  itself. 
The  Directors  of  the  Bank,  having  their  apprehensions  excited  by 
the  reduction  of  their  stock  of  gold,  and  beiog  able  to  replace 
their  loss  only  by  restricted  purchases  of  bullion  at  a  very  losing 
price,  naturally  contracted  their  issues  of  paper ;  and  thus  gave  to 
the  remaining  paper,  as  well  as  to  the  coin  for  which  it  was  inter- 
changeable, an  increased  value ;  while  the  clandestine  exportation 


REPORT   OP  THE   BULLION   CO^SOHTTEE.  201 

either  of  coin  or  the  gold  produced  from  it  combined  in  improving 
the  state  of  the  exchange,  and  in  producing  a  corresponding  dimi- 
nution of  the  difference  between  the  market  price  and  mint  price 
of  gold,  or  of  paper  convertible  into  gold. 

"  It  Avas  a  necessary  consequence  of  the  suspension  of  cash  pay- 
ments," continued  the  Committee,  "  to  exempt  the  Bank  from  that 
drain  of  gold  which  was  sure  to  result  from  an  unfavorable  exchange 
and  a  high  price  of  bullion  ;  and  the  Directors,  released  from  all  fear 
of  such  drain,  and  no  longer  feeling  any  inconvenience  from  such  a 
state  of  things,  had  not  been  prompted  to  restore  the  exchanges 
and  the  price  of  gold  to  their  proper  level,  by  a  reduction  of  their 
advances  and  issues.  The  Directors  in  former  times  did  not,  per- 
haps, perceive  and  acknowledge  the  principle  more  distinctly  than 
those  of  the  present  day;  but  they  felt  the  inconvenience  and 
obeyed  its  imj^ulse,  which  practically  established  a  check  and  limi- 
tation to  the  issue  of  paper.  In  the  present  times,  the  incon- 
venience is  not  felt;  and  the  check,  accordingly,  is  no  longer  in 
force. 

"Your  Committee  beg  leave  to  report  it  to  the  House,  as  their 
most  clear  opinion,  that,  so  long  as  the  suspension  of  cash  payments 
is  permitted  to  subsist,  the  price  of  gold  bullion,  and  the  general 
course  of  exchange  with  foreign  countries,  taken  for  any  consider- 
able period  of  time,  form  the  best  general  criterion  from  which  any 
inference  can  be  drawn  as  to  the  sufficiency  or  excess  of  paper  cur- 
rency in  circulation  ;  and  that  the  Bank  of  England  cannot  safely 
re2:ulate  the  amount  of  its  issues  Avithout  havinsr  reference  to  the 
criterion  jiresented  by  these  two  circumstances.  And,  upon  a  review 
of  all  the  facts  and  reasonings  which  have  already  been  stated,  your 
Committee  are  of  the  further  opinion,  that,  although  the  commercial 
state  of  the  country  and  the  political  state  of  the  Continent  may 
have  had  some  influence  upon  the  high  price  of  gold  bullion,  and  the 
unfavorable  course  of  exchanges  with  foreign  countries,  this  price 
and  this  depreciation  are  also  to  be  ascribed  to  the  want  of  a  per- 
manent check,  and  a  sufficient  limitation  of  the  paper  currency  in 
this  country. 

"  In  connection  with  the  general  subject  of  this  part  of  their 
Report,  the  policy  of  the  Bank  of  England  respecting  the  amount 
of  their  circulation,  your  Committee  have  now,"  said  the  Report, 
"  to  call  the  attention  of  the  House  to  another  topic,  which  was 
brought  under  their  notice  in  the  course  of  their  inquiry,  and 
which,  in  their  judgment,  demands  the  most  serious  consideration. 
The  Bank  Directors,  as  well  as  some  of  the  merchants  who  have 
been  examined,  showed  a  great  anxiety  to  state  to  your  Committee 
a  doctrine  of  the  truth  of  which  they  professed  themselves  to  be 
most  thoroughly  convinced  :  that  there  can  be  no  possible  excess 
in  the  issue  of  Bank  of  England  paper,  so  long  as  the  advances  in 
which  it  is  issued  are  made  upon  the  principles  which  at  present 
guide  the  conduct  of  the  Directors ;  that  is,  so  long  as  the  dis- 
count of  mercantile  bills  is  confined  to  paper  of  undoubted  solidity, 
arising  out  of  real  commercial  transactions,  and  payable  at  short 
and  fixed  periods.     That  the  discounts  should  be  made  only  upon 


202  HISTOET  OF  MONETARY  THEORIES. 

bills  growing  out  of  real  commercial  transactions  falling  due  in  a 
fixed  and  short  period,  are  sound  and  well  established  principles. 
But  that  while  the  Bank  is  restrained  from  paying  in  specie,  there 
need  be  no  other  limit  to  the  issues  of  their  paper  than  what  is  fixed 
by  such  rules  of  discount,  and  that  during  the  suspension  of  cash 
payments,  the  discount  of  good  bills  falling  due  at  short  periods 
cannot  lead  to  any  excess  in  the  amount  of  Bank  paper  in  circula- 
tion, apj^ears  to  your  Committee  a  doctrine  wholly  erroneous  in 
principle,  and  j^regnant  with  dangerous  consequences  in  practice." 

"  If  at  any  time,"  say  the  Committee,  "  they  "  (the  directors) 
"  incautiously  exceeded  the  proper  limit  for  their  advances  and 
issues,  the  paper  was  quickly  brought  back  to  them  by  those 
who  attempted  to  profit  by  the  market  price  of  gold,  or  by  the 
rate  of  exchange."  But  all  the  issues  of  the  Bank  are  speedily 
brought  back  to  it  in  the  payment  of  its  bills,  or  for  coin,  if 
these  be  not  paid,  only  after  they  have  performed  their  func- 
tion as  currency.  The  method  by  which,  according  to  the 
Committee,  they  were  brought  back  was  a  pure  fiction. 
They  assumed,  with  Adam  Smith,  that  the  'moment  there  was 
an  excess  of  paper,  such  excess  would  instantly  cause  a  rise 
in  the  exchanges,  and  would  immediately  be  taken  back  to  the 
Bank  for  coin  by  its  holders,  in  order  to  profit  by  such  advance. 
But  an  excess  of  currency  acts  upon  exchanges,  not  directly, 
but  through  its  consequences  or  effects.  If  an  amount  be 
issued  for  which  there  is  no  constituent,  there  will  be  an  in- 
creased consumption  of  foreign  goods,  to  pay  for  which  coin 
must  be  exported.  The  consumers  of  such  goods  pay  the 
importer  in  Bank  of  England  notes,  which  are  drawn  by  him 
in  coin.  A  long  period,  however,  may  elapse  between  impor- 
tation and  payment,  as  the  purchases  may  be  made  on  very  long 
time,  or  may  be  carried  for  a  long  time  on  bankers'  credits. 
The  effect  of  an  over-issue,  therefore,  is  remote  and  consequen- 
tial, seldom  direct.  Nothing  whatever  would  be  gained  by 
buying  up  the  notes  of  the  Bank,  for  the  sake  of  obtaining 
coin  for  the  purpose  of  profiting  by  the  rise  of  exchange,  for 
the  reason  that  the  notes  would  cost  their  purchaser  their  value 
in  coin.  The  only  parties  who  would  profit  by  a  rise  in  ex- 
change would  be  importers  who  had  accumulated  notes  when 
the  exchanges  were  at  par,  and  who  could  put  up  the  price  of 
their  goods  with  the  rise  in  the  price  of  the  former.  The 
Committee  simply  repeated  Smith  in  saying,  that  "■  the  whole 
paper  money  which  can  easily  be  cii'culated  in  a  country  can 


EEPORT   OF   THE   BULLION   COMMITTEE.  203 

never  exceed  the  value  of  the  gold  and  silver  of  which  it  sup- 
plies the  place.  Should  the  circulating  paper  at  any  time 
exceed  that  sura,  as  the  excess  could  neither  be  sent  abroad, 
nor  employed  in  the  circulation  of  the  country,  it  must  return 
immediately  upon  the  Banks,  to  be  exchanged  for  gold  and 
silver.  Many  people  would  unmediately  perceive  that  they 
had  more  of  this  paper  than  was  necessary  for  transacting  their 
business  at  home  ;  and,  as  they  could  not  send  it  abroad,  they 
would  immediately  demand  payment  for  it  at  the  Banks. 
When  this  superfluous  paper  was  converted  into  gold  and 
silver,  they  could  easily  find  a  use  for  it  by  sending  it  abroad ; 
but  they  could  find  none  while  it  remained  in  the  shape  of 
paper."  ^  Such  was  precisely  the  idea  of  the  Committee. 
The  assumption  and  process,  however,  were  purely  imaginary. 
All  the  issues  of  the  Bank,  so  long  as  confidence  is  felt  in  them, 
return  to  it  with  equal  regularity  and  in  equal  volume, 
whether  they  represent  capital,  or  whether  they  are  purely 
fictitious.  If  loans  are  properly  made,  its  issues  are  returned  ^ 
by  its  customers  ;  if  not,  they  must  be  taken  in  out  of  its  re- 
serves. The  result  alone  can  determine  the  character  of  the  issue, 
and  such  result  may  be  postponed  for  a  long  time  ;  for  an  ex- 
cess of  issue,  by  inflating  prices,  will,  for  a  time,  cause  payments 
to  be  made  more  promptly  in  consequence.  Years  may  elapse 
before  the  period  of  liquidation  comes  round.  The  question, 
therefore,  is  not  one  of  quantity,  but  of  quality.     The  issues  of 

1  See  ante,  p.  129. 

2  A  calculation  made  by  the  Bank  in  1818,  to  ascertain  the  number  of  days 
that  bank-notes  of  each  denomination  remained  in  circulation,  showed  the  follow- 
ing results  :  — 


£1  and  £2,  147  days 

Notes  of  £40,  38  days 

6      148  „ 

50  72  „ 

10      137  „ 

100  49  „ 

15       60  „ 

200  18  „ 

20      121  „ 

300  14  „ 

25       43  „ 

500  14  „ 

30       55  „ 

1,000  13  „ 

The  average  time  the  notes  remained  in  circulation,  assuming  that  equal 
amounts  of  the  different  denominations  were  issued,  equalled  about  twenty-eight 
days.  The  one,  two,  and  three  pound  notes  remained  in  circulation  about  four 
and  a  half  months.  The  time  in  which  the  notes  of  £300  and  upwards,  by 
means  of  which  the  greater  portion  of  the  exchanges  must  have  been  effected, 
remained  in  circulation,  equalled  thirteen  and  one  half  days.  —  Gilbart  on  Bank- 
ing, p.  43. 


204  HISTORY   OF    MONETARY  THEORIES. 

the  Bank,  if  properlj-  made,  can  never  be  in  excess.  If  improp- 
erly made,  every  note  will  be  in  excess.  The  Committee 
simply  reiterated,  in  effect,  the  dogma  of  Smith,  that  money 
was  an  instrument,  —  a  wheel  of  commerce,  —  the  value  of 
which  depended  upon  the  relation  its  quantity  bore  to  the 
quantity  or  value  of  goods  to  be  exchanged ;  and  that  inherent 
value  was  no  necessary  attribute  of  it. 

So  long  as  the  Bank  was  liable,  say  the  Committee,  to  dis- 
charge its  notes  in  coin  on  presentation,  it  conducted  its  affairs 
in  view  of  such  a  liability.  Relieved  from  this  obligation,  it 
should  have  conducted  them  in  reference  to  the  price  of  gold 
and  the  condition  of  the  exchanges.  To  act  in  reference  to  such 
standard  or  rule  would  be  to  resume ;  for  it  could  make  its 
notes  equal  in  value  to  coin,  only  by  paying  coin  when  de- 
manded. This  it  was  forbidden  to  do.  It  could  not  do  this  so 
long  as  it  remained  in  the  power  of  government ;  and  there  was 
no  hope  that  the  latter  would  relax  its  grasp  till  peace  was 
finally  established.  The  proposition  of  the  Committee,  there- 
fore, was  an  absurdity  upon  its  face.  No  contraction  of  the  cur- 
rency in  the  condition  of  affairs  would  have  increased  the 
amount  of  gold  in  the  Bank.  It  could  not  expect  its  bills  to  be 
paid  in  any  other  currency  than  its  own  notes  ;  and,  if  it  had  not 
reissued  them,  the  country  would  speedily  have  been  without 
any  currency  whatever.  The  nation  would  have  succumbed 
in  the  tremendous  struggle  in  which  it  was  engaged,  while 
society  would  speedily  have  been  remitted  to  a  condition  of 
barter.  In  the  emergency,  the  Bank  adopted  the  only  possible 
course  open  to  it :  it  continued  to  pursue  that  which  had  en- 
abled it  to  maintain  specie  pajmients  for  more  than  a  hundred 
years  consecutively,  previous  to  the  Restriction  Act.  By  a  rigid 
adherence  to  it,  it  restored  its  position,  after  suspension,  with 
marvellous  celerity.  So  rapidly  did  it  recover  itself,  that  in 
1800  it  was  perfectly  able  to  resume  payment,  and  would  have 
resumed  could  the  consent  of  government  have  been  obtained. 
It  is  very  probable  that  the  Directors  did  not  realize  the  great 
importance  of  such  a  step,  or  they  might  have  brought  the 
government  to  their  views.  The  rule  they  followed  during 
suspension,  of  discounting  paper  representing  merchandise  and 
having  a  short  time  to  run,  was  the  only  possible  one  for  them 
to  follow.   It  not  only  saved  the  nation  from  ruin,  but'  promoted 


EEPORT   OF   THE    BULLION   COMMITTEE.  205 

its  welfare  in  the  highest  degree.     While  acting  in  such  man- 
ner, they  did  not  see  that  suspension  removed  the  real  check 
to  an  undue  expansion  of  the  cm-rency.    In  this  they  were  not 
wiser  than  their  time.     So  long  as  a  Bank  pays  specie,  every 
mistake  it  makes,  every  improper  discount,  has  finally  to  be 
made  good  by  paying  out  a  corresponding  amount  of  coin. 
As  this  is  drawn,  its  ability  to  make  further  loans  is  lessened 
in  the  same  degree.    After  suspension,  in  case  its  notes  are  not 
retired  by  the  payment  of  its  bills,  its  ability  to  make  loans  in 
the  future  is  not  reduced,  for  the  reason  that,  by  creation  of 
new  notes  which  cost  nothing,  it  can  replenish  its  reserves, 
consisting  of  notes,  to  any  amount.    It  is  like  a  ship  at  sea  that 
has  lost  its  compass,  and  all  means  of  determining  its  position. 
It  must  sail,  if  it  sail  at  all,  by  the  best  lights  it  has  ;  and, 
although  its  general  direction  may  be  plain  enough,  it  may  in 
time  find  itself  far  out  of  its  proper  course ;  so  that,  when  it 
makes  land,  it  may  be  wrecked,  or  may  have  to  refit,  and  so 
reach  its  destined  harbor  with  great  loss  and  damage.     It  was 
only  when  the  Bank  came   into  port,  as  it  were,  —  when  it 
undertook  to  resume  by  converting  its  assets  into  coin,  —  that 
the  degree  of  its  departure  and  the  losses  it  sustained  could 
be  ascertained.     It  was  not  shipwrecked,  although  it  suffered 
great  loss.     With  the  lights  it  had,  it  pursued  the  course  best 
fitted  to  promote  the  welfare  of  the  nation  as  well  as  its  own. 
The  error  of  the  Committee  consisted  not  only  in  denying  the 
correctness  of  the  rule  followed  by  the  Bank,  which  was  the 
only   practicable  one,  but  in  imposing  one  impossible   to   be 
followed.     It  never  occurred  to  them  to  inquire  whether  the 
evils  complained  of  might  not  have  arisen  from  other  modes 
by  which  the  Bank  made  its  loans.    At  that  time  it  had  loans 
upon   governments.   Exchequer  bills,  to  the  amount  of  fully 
.£17,000,000;    the  amount  of  loans   upon   bills   at   the  time 
equalling  about  '.£20,000,000.     Such  inquiry,  if  made,  might 
have    shown    that  the    condition  of  affairs  might  be   almost 
wholly  referrible  to  the  action  of  the  Bank  in  its  relation  to 
the  government.     The  sudden  recovery  of  the  former,  after 
the  passage  of  the  Restriction  Act,  —  a  recovery  wholly  due 
to  a  rigid   adherence    to  the  principles  upon  which   a   con- 
vertible currency  must  rest,  —  attracted  no  attention  what; 
ever.     It  would  be  supposed  that  so  remarkable  a  phenomenon 
would  have  received  the  most  careful  investigation.      That 


206  HISTORY   OF   MONETARY  THEORIES. 

neither  such  recovery,  nor  the  relation  of  the  Bank  to  the 
government,  were  made  subjects  for  consideration  by  the 
Committee,  shows  how  narrow  were  their  vision  and  scope. 
It  is  not  improbable,  however,  that  both  Directors  and  Com- 
mittee assumed  that  no  inflation  or  harm  could  come  of  loans 
made  upon  public  securities ;  that  the  value  of  such  must  be 
a  sufficient  guarantee  of  the  propriety  and  value  of  all  issues 
made  upon  them.  Nothing  can  be  more  natural  than  such 
inference,  as  the  share  capital  of  the  Bank  had,  from  the 
outset,  been  wholly  invested  in  public  securities ;  and  as  the 
Bank,  so  organized,  had  continued  to  pay  specie  for  more  than 
one  hundred  years  consecutively.  With  Englishmen,  a  prece- 
dent—  an  ounce  of  the  past  —  outweighs  a  ton  of  the  future  ; 
so  that,  with  them,  the  old  disappears  only  by  being  absorbed 
or  overlaid  by  the  almost  imperceptible  growth  of  the  new. 
Such  trait  may  be  referred  to  in  their  praise,  and  may  be  the 
reason  why  their  progress,  though  so  slow,  has  been  so  uniform 
and  sure,  and,  through  the  ages,  so  immense. ^ 

1  Economists  have  never  been  able  to  master  the  reason  of  the  sudden  recov- 
ery of  the  Bank  after  the  Restriction  Act,  due  wholly  to  the  prudent  conduct  of 
the  Directors  in  making  their  loans.  For  them,  it  only  re-enforced  the  old  dogma, 
that  the  value  of  the  currency  depends  upon  quantity  alone.  The  rise  of  the 
notes  of  the  Bank  to  par  after  the  suspension  is  now  accepted  as  fully  proving 
such  assumption.  The  explanation  given  by  Tooke  is  a  curious  illustration  of 
the  treatment  by  the  Economists  of  this  as  well  as  of  similar  subjects  :  — 

"  It  becomes  a  curious  matter  of  speculation  to  inquire,  how,  with  motives  so 
strong  to  constant  and  progressive  excess,  and  under  the  guidance  of  maxims  and 
principles  so  unsound  and  of  such  apparently  mischievous  tendency  as  those  pro- 
fessed by  the  Governor  and  some  of  the  Directors  of  the  Bank,  in  1810,  such  mod- 
eration and  (with  some  exceptions  wliich  will  be  noticed  hereafter)  such  regularity 
of  issue  should,  under  chances  and  changes  in  politics  and  trade  unprecetlented  in 
violence  and  extent,  have  been  preserved,  as  that  a  spontaneous  readjustment 
between  the  value  of  gold  and  the  paper  should  have  taken  place,  as  it  did,  with 
out  any  reduction  of  their  circulation. 

"  The  explanation  of  the  difficulty  seems  to  be  this  :  the  rule  by  which  the 
Bank  Directors  professed  to  be,  and  were  in  the  main,  guided,  —  viz.,  the  demand 
of  good  mercantile  bills,  not  exceeding  sixty-one  days'  date,  at  the  rate  of  five  per 
cent  per  annum,  —  did,  with  the  necessary  policy  of  government  in  periodically 
reducing  the  floating  debt  within  certain  limits  by  funding,  operate  as  a  principle 
of  limitation  upon  the  total  issues  of  the  Bank.  And  the  reason  of  the  rule  having 
so  operated  is  to  be  found  in  the  fact,  that  the  market  rate  of  interest  for  bills  of 
the  description  which  were  alone  discountable  at  the  Bank  did  not  materially,  or 
for  any  lengtli  of  time  together,  exceed  the  rate  of  five  per  cent  per  annum.  But 
the  Bank  Directors  seem  to  have  been  unaware  of  the  precise  mode  of  operation 
by  which  their  rule  had  the  effect  of  a  principle  of  limitation  against  great  or 
permanent  excess  in  their  circulation."  —  Tooke's  History  of  Prices,  Vol.  i. 
p.  158. 

The  rule  of  the  Bank  in  discounting  bills  having  sixty-one  days  to  run,  at  the 


EEPORT   OF   THE   BULLTO^T   C05ITMITTEE.  207 

"  By  far  the  most  important  of  these  consequences,"  continues 
the  Report,  "  is,  that  while  the  convertibility  into  specie  no  lono-er 
exists  as  a  check  to  an  overissue  of  paper,  the  Bank  Directors 
have  not  perceived  that  the  removal  of  that  check  rendered  it 
possible  that  such  an  excess  might  be  issued  by  the  discount  of 
perfectly  good  bills.  So  far  from  perceiving  this,  your  Committee 
have  shown  that  they  maintain  the  contrary  doctrine  with  the 
utmost  confidence,  however  it  may  be  qualified  occasionally  by 
some  of  their  expressions.  That  this  doctrine  is  a  very  fallacious 
one,  your  Committee  cannot  entertain  a  doubt.  The  fallacy  upon 
which  it  is  founded  lies  in  not  distinguishing  between  an  advance 
of  capital  to  merchants  and  an  addition  of  supply  of  currency  to 
the  general  mass  of  circulating  medium.  If  the  supply  of  capital 
only  is  considered,  as  made  to  those  who  are  ready  to  employ  it  in 
judicious  and  productive  undertakings,  it  is  evident  there  need 
be  no  other  limit  to  the  total  amount  of  advances  than  what  the 
means  of  the  lender,  and  his  prudence  in  the  selection  of  borrowers, 
may  impose.  But  in  the  present  situation  of  the  Bank,  intrusted 
as  it  is  with  the  function  of  supplying  the  public  with  that  paper 
currency  which  forms  the  basis  of  our  circulation,  and  at  the  same 
time  not  subjected  to  the  liability  of  converting  the  paper  into  specie, 
every  advance  Avhich  it  makes  of  capital  to  the  merchants  in  the 
shape  of  discount,  becomes  an  addition  also  to  the  mass  of  circulat- 
ing medium.  In  the  first  instance,  when  the  advance  is  made  by 
notes  paid  in  discount  of  a  bill,  it  is  undoubtedly  so  nuich  capital, 
so  much  power  of  making  purchases,  placed  in  the  hands  of  the 
merchant  who  receives  the  notes  ;  and,  if  those  hands  are  safe,  the 
operation  is  so  far,  and  in  this  its  first  step,  useful  and  productive 
to  the  public.  But  as  soon  as  the  portion  of  circulating  medium 
in  which  the  advance  was  thus  made  performs,  in  the  hands  of  him 
to  Avhom  it  was  advanced,  this  its  first  operation  as  capital,  as  soon 
as  the  notes  are  exchanged  by  him  for  some  other  article  which  is 
capital,  they  fall  into  the  channel  of  circulation  as  so  much  circulat- 
ing medium,  and  form  an  addition  to  the  mass  of  currency.  The 
necessary  effect  of  every  such  addition  to  the  mass  is  to  diminish 
the  relative  value  of  any  given  portion  of  that  mass,  in  exchange  for 
commodities.  If  the  addition  were  made  by  notes  convertible  into 
specie,  this  diminution  of  the  relative  value  of  any  given  portion 
of  the  whole  mass  would  speedily  bring  back  upon  the  Bank  which 
issued  the  notes,  as  much  as  was  excessive.  But  if  by  law  they  are 
not  so  convertible,  of  course  this  excess  will  not  be  brought  back  ; 
but  will  remain  in  the  channel  of  circulation,  until  paid  in  again 
to  the  Bank  itself  in  discharge  of  the  bills  which  were  originally 

rate  of  five  per  cent,  did,  according  to  Tooke,  "  operate  as  a  principle  of  limita- 
tion upon  the  total  issues  of  the  Kank."  And  why  1  Because  "  the  market  rate 
of  interest  for  bills  of  the  description  which  were  alone  discountable  at  the  Bank 
did  not  materially,  or  for  any  length  of  time  together,  exceed  the  rate  of  five 
cent  per  annum  !  "  Such  is  the  argument  and  conclusion  of  one  of  the  great  lights 
among  the  modern  Economists,  whose  works  are  probably  more  referred  to,  and 
quoted  with  more  approbation,  than  those  of  almost  any  one  of  his  school. 


208  HTSTOET  OF  IVIOXETAEY   THEORIES. 

disconntecl.  During  the  whole  time  they  remain  out,  they  perform 
all  the  functions  of  circulating  medium  ;  and,  before  they  come  to 
be  paid  in  discharge  of  those  bills,  they  have  already  been  followed 
by  a  new  issue  of  notes  in  a  similar  operation  of  discounting. 
Each  successive  advance  repeats  the  same  process.  If  the  whole 
sum  of  discount  continue  outstanding  at  a  given  amount,  there 
will  remain  permanently  out  in  circulation  a  corresponding  amount 
of  paper ;  and,  if  the  amount  of  discounts  is  progressively  increas- 
ing, the  amount  of  paper  which  remains  out  in  circulation  over  and 
above  what  is  otherwise  wanted  for  the  occasions  of  the  public 
will  progressively  increase  also,  and  the  money  prices  of  com- 
modities will  progressively  rise.  This  progress  may  be  as  indefinite 
as  the  range  of  speculation  and  adventure  in  a  great  commercial 
country." 

As  the  Bank,  in  making  its  loans,  pays  out  its  notes  instead 
of  capital,  these,  if  they  represent  capital,  will  as  a  rule  be  dis- 
charged only  by  its  consumption.     That  they  are  outstanding, 
is  evidence  that  the  merchandise  they  represent  is  not  con- 
sumed.    They  have,  therefore,  until  taken  in  by  the  Bank,  the 
same  value,  by  virtue  of  representing  the  same  merchandise, 
no  matter  into  whose  hands  they  may  fall.     It  is  their  possesr- 
sion  which  entitles  their  holder  to  the  merchandise  they  repre- 
sent.    That  they  change  their  character  before  their  retirement 
—  being  capital  in  the  hands  of  the  party  to  whom  they  were 
first  issued,   and   currency,   representing  no   capital,  in   the 
hands  of  all  subsequent  holders  —  is  an  assumption  which  is 
exactly  opposed  to  the  fact.     They  are  never  discharged  of 
their  value  till  they  come  back  to  the  party  issuing  them. 
Whatever  are  issued,  equally  fall  into  the  channel  of  circula- 
tion, and  alike  return  to  the  Bank  for  retirement;  so  that, 
unless  they  were  reissued,  there  would  presently  be  no  cur- 
rency outstanding.     Just  in  ratio  that  the  bills  of  a  Bank  are 
paid  are  its  liabilities  taken  in.     They  ^vill  be  paid  in  equally 
after  as  before  suspension  by  the  Bank.     If,  at  a  particular 
moment,  currency,  which  was  capital  in  the  hands  of  one  per- 
son ceased  to  be  capital  in  the  hands  of  another,  without  any 
change  in  its  form,  or  in  that  which  it  represented,  certainly 
the  Committee  should  have  shown,  or  have  attempted  to  show, 
the  process  by  which,  and  the  time  at  which  the  change  in  value 
was  effected.     A  moment's  reflection  would  have  shown  that  no 
such  change  could  have   taken  place ;   but  such  is  not  the 
way  with  the  Economists.     Not  one  of  them  ever  broke  through 
the  crust  of  words  and  assumptions  by  means  of  which  the 


P.EPOET    OF   THE   BULLION   CO]M:ynTTEE.  209 

real  principles  of  currencv  hare  been  concealed  from  sight. 
How  the  fictions  thev  uttered  could  have  been  accepted  as 
sober  truths  by  Horner,  Thornton,  and  Huskisson  exceeds 
belief.  It  is  infinitely  more  incredible  than  that  those  of  the 
Alchemists  should  have  been  accepted  in  a  credulous  and  un- 
scientific age.  The  transmutation  of  lead,  tin,  and  quicksilver 
into  gold  was  a  proposition  ten  times  more  credible  than  the 
transmutation  of  a  bank-note  from  something  into  nothing. 
That  such  fables  could  reallv  have  been  accepted  as  funda- 
mental truths  by  the  wisest,  most  discreet,  and  most  earnest  of 
our  race,  is  mortifying  evidence  of  our  weakness,  and  shows 
how  little  confidence  we  are  entitled  to  place  even  in  our 
strongest  convictions. 

"  VTe  must  not  omit,"  continues  the  Committee,  "  to  state  one  very 
important  principle  :  that  mere  numerical  return  of  the  amount  of 
bank-notes  out  in  circulation  cannot  be  considered  as  at  all  decid- 
incr  the  question  whether  such  paper  is  or  is  not  excessive.  It  is 
necessary  to  have  recourse  to  other  tests.  The  same  amount  of 
paper  may,  at  one  time,  be  less  than  enough,  and,  at  another 
time,  more.  The  quantity  of  currency  required  will  vary  in  some 
degree  with  the  extent  of  trade :  and  the  increase  of  our  trade, 
which  has  taken  place  since  the  suspension,  must  have  occasioned 
some  increase  in  the  quantity  of  our  currency.  But  the  quantity  of 
currency  has  no  fixed  proportion  to  the  quantity  of  commodities ; 
and  any  inferences  proceeding  upon  such  a  supposition  would  be 
entirely  erroneous.  The  effective  currency  of  a  country  depends 
upon  the  quickness  of  circulation,  and  the  number  of  exchanges 
performed  in  a  given  time,  as  well  as  upon  its  numerical  amount ; 
and  all  the  circumstances  which  have  a  tendency  to  quicken  or 
to  retard  the  rate  of  circulation  render  the  same  amount  of  cur- 
rency more  or  less  adequate  to  the  wants  of  trade.  A  much  smaller 
amount  is  required  in  a  high  state  of  public  credit  than  when 
alarms  make  individuals  caU  in  their  advances  and  provide  against 
accidents  by  hoarding,  and  in  a  period  of  commercial  security  and 
private  confidence,  than  when  mutual  distrust  discourages  pecuni- 
arv  arrancrements  for  any  distant  time.  But,  above  all,  the  same 
amount  of  currency  will  be  more  or  less  adequate,  in  proportion  to 
the  skill  which  the  great  money-dealers  possess  in  managing  and 
economizing  the  use  of  the  circulating  medium.  Your  Committee 
are  of  opinion,  that  the  improvements  which  have  taken  place  of 
late  years  in  this  country,  and  particularly  in  the  district  of  Lon- 
don, with  resrard  to  the  use  and  economy  of  money  among  bankei-s, 
and  in  the  mode  of  adjusting  commercial  payments,  must  have  had 
a  much  2:reater  effect  than  has  hitherto  been  ascribed  to  them,  in 
rendering:  the  same  sum  adequate  to  a  much  greater  amount  of  trade 
and  payments  than  formerly.  Some  of  those  improvements  will  be 
found  detailed  in  the  evidence.     They  consist  principally  in  the  in- 

14 


210  HISTORY  OF   MONETARY   THEORIES. 

creased  use  of  banker's  drafts  in  the  common  payments  of  London; 
the  contrivance  of  bringing  all  such  drafts  daily  to  a  common 
receptacle,  where  they  are  balanced  against  each  other ;  and  the  inter- 
mediate agency  of  bill-brokers.  And  several  other  changes  in  the 
practice  of  London  bankers  are  to  the  same  effect,  of  rendering  it 
unnecessary  for  them  to  keep  so  large  a  deposit  of  money  as  for- 
merly. Within  the  London  district,  it  would  certainly  appear  that  a 
smaller  sum  of  money  is  required  than  formerly,  to  perform  the 
same  number  of  exchanges  and  amount  of  payments,  if  the  rate  of 
prices  had  remained  the  same.  It  is  material  also  to  observe,  that 
both  the  policy  of  the  Bank  of  England  itself,  and  the  competition  of 
the  country  Bank  paper,  have  tended  to  compress  the  paper  of  the 
Bank  of  England  more  and  more  within  London  and  the  adjacent 
districts.  All  th^se  circumstances  must  have  co-operated  to  render  a 
smaller  augmentation  of  Bank  of  England  paper  necessary  to  supply 
the  demands  of  our  increased  trade,  than  might  otherwise  have 
been  required  ;  and  show  how  impossible  it  is,  from  the  numerical 
amount  alone  of  that  paper,  to  pronounce  whether  it  is  excessive 
or  not.  A  more  sure  criterion  must  be  resorted  to  ;  and  such  a  crite- 
rion, your  Committee  have  already  shown,  is  only  to  be  found  in 
the  state  of  the  exchanges  and  the  price  of  gold  bullion. 

"  Upon  a  review  of  all  the  facts  and  reasonings  which  have  been 
submitted  to  the  consideration  of  your  Committee  in  the  course  of 
their  inquiry,  they  have  formed  an  ojunion,  which  they  submit  to 
the  House  :  That  there  is,  at  present,  an  excess  in  the  paper  circu- 
lation of  this  country,  of  which  the  most  unequivocal  symptom  is  the 
very  high  price  of  bullion,  and,  next  to  that,  the  low  state  of 
the  Continental  exchanges ;  that  this  excess  is  to  be  ascribed  to 
the  want  of  a  sufficient  check  and  control  in  the  issues  of  the  paper 
from  the  Bank  of  England,  and,  originally,  to  the  suspension  of 
cash  payments,  which  removed  the  natural  and  true  control.  For, 
upon  a  general  view  of  the  subject,  your  Committee  are  of  opinion, 
that  no  safe,  certain,  and  constantly  adequate  provision  against 
an  excess  of  paper  currency,  either  occasional  or  permanent,  can  be 
found,  except  iu  the  convertibility  of  all  such  paper  into  specie." 

If  money  be  capital,  it  must  obey  the  laws  of  capital.  For 
the  movement  of  the  latter,  two  parties  must  consent,  each 
governed  by  considerations  having  reference  to  his  interests 
alone.  Suppose  one  hundred  hogsheads  of  sugar  to  be  sold 
and  paid  for  three  times  during  the  same  day :  no  one  would 
say  that  the  activity  of  its  movement  had  any  necessary  re- 
lation to  its  value,  or  that  a  less  quantity  was  required  by 
reason  of  such  activity.  Precisely  the  same  law  holds  as  to 
money.  That  it  changes  hands  several  times  in  a  day  does 
not  increase  or  diminish  its  value ;  nor  is  a  greater  or  less 
quantity  required  in  consequence.  If  money  be  active,  mer- 
chandise must  be  active.     The  relation  of  one  to  the  other, 


REPORT   OF   THE   BULLION   COMMITTEE.  211 

both  in  quantity  and  activity,  must  be  uniform.  When  sym- 
bolic money  is  used,  the  title  to  that  which  it  represents  is  trans- 
ferred with  the  transfer  of  the  instrument.  It  is  onl}-  upon  the 
supposition  that  money  is  not  capital,  nor  the  representative  of 
capital,  that  the  assumptions  of  the  Committee  can  be  sus- 
tained. If  not  capital,  it  is  a  scale  of  valuation,  —  an  instru- 
ment of  commerce  like  a  set  of  weights.  If  a  community 
consisting  of  a  hundred  families  possess  only  one  scale  or  set, 
the  whole  must  use  it.  The  degree  of  its  activity  or  use, 
in  such  case,  measures  its  value.  In  its  use,  however,  it  is  not 
parted  with  as  the  equivalent  in  value  of  that  which  it  meas- 
ures. So  soon  as  it  is  used  by  one  family  it  is  passed  to  an- 
other, to  come  round  again  in  time  to  the  one  first  using  it. 
But  money,  by  its  use,  for  ever  passes  from  the  hands  of  the 
party  using  it.  He  cannot  hand  it  over  to  his  neighbor,  to 
perform  the  same  service  that  it  did  for  him.  When  properly 
analj^zed,  therefore,  no  more  meaning  can  be  attached  to  the 
statement,  that  "  the  effective  currency  of  a  country  depends 
upon  the  quickness  of  circulation  and  the  number  of  ex- 
changes performed  in  a  given  time,  as  well  as  upon  its  numer- 
ical amount,"  than  to  a  statement,  that  one  barrel  of  flour,  by 
the  rapidity  of  its  circulation,  may  serve  the  purposes  of  three 
barrels.  The  quantity  of  money  must  always  be  in  ratio  to 
the  exchanges  that  are  made.  When  a  symbolic  currency  is 
used,  the  tendency  of  all  merchandise  entering  into  consump- 
tion is  to  express  itself  in  it. 

The  Committee  asserted  that  a  much  smaller  amount  of 
money  —  coin  and  bank-notes  —  sufficed  for  the  wants  of  the 
public  than  formerly,  from  the  greater  economy  of  their  use  ; 
checks  upon  Banks  and  bankers  having  taken  their  place. 
What  is  the  difference  between  checks  on  Banks  and  bankers 
and  their  notes  ?  Nothing,  whatever,  but  form.  Neither  are, 
in  themselves,  capital..  Both  equally  represent  capital.  Both 
serve  as  instruments  for  the  exchange  of  capital.  Both 
equally  entitle  their  holder  to  coin,  and  both  are  equally  en- 
titled to  be  called  money.  To  say  that  fewer  notes  are  required 
from  the  economy  of  their  use,  is  the  same  as  to  say  that  a 
nation  economizes  in  sailing  vessels  by  the  employment  of 
steam  ships.  The  latter  tend  to  supersede  the  former,  from 
the  greater  convenience  of  their  use.     To  assign  to  the  two 


212  HISTORY   OF   MONETARY   THEORIEa. 

kinds  of  ships  functions  wholly  unlike,  in  the  transportation  of 
merchandise,  is  to  make  distinctions  where  no  differences 
whatever  exist.  So  checks  drawn  upon  Banks  and  bankers 
tend,  for  the  same  reason,  to  supersede  the  notes  issued  by 
them.  To  erect  a  system  of  finance  upon  a  radical  difference 
between  the  two  kinds  of  currency  is  the  very  climax  of  folly. 

The  Report  of  the  Bullion  Committee  was  accompanied  by  a 
series  of  resolutions  embodying  the  conclusions  to  which  it 
finally  came,  and  declaring  that  cash  payments  ought  to  be 
resumed  by  the  Bank  within  the  period  of  two  years.  Mr. 
Vansittart,  in  behalf  of  the  government,  moved  a  series  of  op- 
posing resolutions,  in  which  he  declared  that  the  cause  of  the 
difference  in  the  market  price  of  bank-notes  and  gold  was,  not 
that  the  value  of  notes  had  depreciated,  but  that  the  value  of 
gold  had  risen.  In  his  speech  on  the  occasion,  he  declared  that 
a  standard  such  as  that  supposed  by  the  Committee,  consisting 
of  a  fixed  and  invariable  weight  of  the  precious  metals,  had 
never  existed  in  England ;  that  the  legal  coin  of  the  country 
never  possessed  a  value  estimated  by  a  fixed  quantity  of  gold 
and  silver  bullion  ;  that  the  notes  of  the  Bank  never  had  any 
other  than  a  current  value,  founded  on  the  public  confidence 
in  it ;  that  a  diminution  in  the  value  of  the  currency  might 
have  had  the  effect  of  improving  the  exchange,  but  could  not 
by  any  possibility  depress  it.  Mr.  Horner's  resolutions  were 
defeated  in  the  House  of  Commons  by  a  very  large  majority  ; 
that  requiring  the  Bank  to  resume  within  two  years  being 
rejected  by  a  vote  of  180  to  45.  Upon  the  defeat  of  Mr. 
Horner's  resolutions,  those  of  Mr.  Vansittart  were  taken  up, 
and  passed  by  a  vote  almost  equally  decisive.  Nothing,  of 
course,  could  be  more  absurd  than  the  statements  embodied  in 
the  latter  resolutions.  A  person  who  should  offer  similar 
ones  at  the  present  day  would  be  treated  as  a  lunatic.  The 
action  of  the  House  had  no  reference  whatever  to  the  merits 
of  either.  The  great  majority  of  its  members  were  the  pliant 
tools  of  the  government,  which  had  no  idea  of  depriving  itself 
of  the  means  of  carrying  forward  the  vast  military  operations 
in  which  it  was  engaged. 

In  order  to  give  a  proper  sanction  to  the  action  of  the  House 
upon  Mr.  Vansittart's  resolution.  Lord  Stanhope  brought  in  a 
Bill  which  made  it  a  misdemeanor  to  make  any  difference  in 


BEPOET    OF    THE   BULLION   COMlVnTTEE.  213 

payment  between  guineas  and  bank-notes.  This  was  passed 
by  a  large  majority  in  both  Houses.  The  act  proved,  as  mio-ht 
have  been  expected,  wholly  inoperative  ;  guineas  continuing  to 
sell  at  a  high  premium  compared  with  notes.  The  Courts  of 
law,  to  their  credit,  declared  it  to  be  no  crime  to  sell  guineas 
at  a  premium,  and  set  aside  the  conviction  of  a  party  who  had 
made  such  sales.  Lord  Stanhope's  bill,  however,  remained  on 
the  Statute  Book  during  the  whole  period  of  the  Restric- 
tion Act. 

There  can  be  no  doubt  that  the  high  price  of  coin  and  ex- 
change was  due  to  an  excess  of  Bank  of  England  notes.  To 
restore  their  equilibrium,  their  amount,  say  the  Committee,  must 
be  reduced.  But  no  reduction  in  amount  of  paper  improperly 
issued  will  bring  up  its  value,  except  so  far  as  such  reduction 
indicates  the  means  of  the  issuer.  No  amount  of  reduction 
of  legal-tender  notes  will  have  the  effect  to  bring  their  value 
to  par,  even  if  there  be  not  a  dollar  of  other  kind  of  paper 
money  in  circulation.  So  far  as  the  Bank  of  England  notes 
resembled  legal-tender  notes,  no  amount  of  reduction  would 
have  brought  them  to  par.  Their  price  would  equal  their  real 
value.  The  question  of  all  others,  therefore,  —  the  manner 
in  which  the  notes  should  be  issued,  in  order  to  render 
them  at  all  times  the  equivalent  of  coin,  —  the  Committee 
wholly  overlooked.  What  their  Report  did  prove  or  establish 
has  been  a  riddle  compared  with  which  that  of  the  Sphinx 
was  of  the  easiest  solution.  That  it  established  no  truth, 
that  it  did  not  advance  monetary  science  a  single  step,  is 
proved  by  the  fact,  that,  instead  of  reconciling,  it  only  served 
to  increase  the  confusion,  and  exasperate  the  diiferences  which 
already  prevailed.  It  divided  England  into  two  great  camps,  — 
BuUionists  and  Anti-Bullionists,  —  separated  by  hardl}^  any 
other  than  verbal  distinctions ;  each  waging  a  fierce  and  incessant 
war  of  words,  in  which  the  discussion  of  principles  had  no 
place  whatever.  The  more  consistent  party  were  the  Anti- 
Bullionists,  who  altogether  ignored  value  as  an  attribute  of 
money.  On  the  other  hand,  the  BuUionists  held  that  value 
might  or  might  not  be  an  attribute  of  it.  They  held  the  test 
of  the  propriety  of  its  issue  to  be  its  convertibility  into  coin ; 
at  the  same  time  holding  that  it  would  have  a  value  equal  to 
that  of  coin,  and  "consequently  would  be  exchangeable  at  all 


214  HISTORY  OF  MONETARY  THEORIES. 

times  for  it,  although  no  provision  were  made  for  its  conver- 
sion, provided  its  amount  did  not  exceed  that  required  by  a 
community  for  its  exchanges.  The  only  effect  of  the  Report, 
therefore,  was  to  establish  on  a  still  firmer  basis  that  absurdest 
of  all  errors  in  monetary  science,  that  value  is  no  necessary 
attribute  of  money.  It  was  claimed  by  the  Bullionists  that 
the  Report  proved  the  superiority  of  a  metallic  over  a  paper 
currency.  It  proved  nothing  of  the  kind,  for  the  reason 
that  nothing  of  the  kind  can  be  proved.  The  Committee 
might  just  as  well  have  attempted  to  prove  the  superiority  of 
iron  over  wood  in  the  arts.  Each  is  superior  in  its  way.  Paper 
money,  properly  issued,  is,  from  its  greater  convenience,  superior 
to  gold  in  exchanges  of  property.  It  is  far  more  convenient  to 
use  a  thousand  dollar  bank-note  than  it  is  a  thousand  dollars 
m  gold  or  silver.  On  the  other  hand,  a  metallic  is  superior 
to  a  paper  currency,  if,  it  be  necessary  to  send  money  to  other 
countries,  or  if  the  object  be  to  hold  it  as  reserves,  or  to  pay 
balances  resulting  after  symbols  are  exhausted.  The  report, 
undoubtedly,  contained  much  useful  information  as  to  the 
state  of  exchanges  and  the  financial  condition  of  the  country  at 
the  time,  and  proved  the  depreciation  in  value  of  the  bank-notes. 
It  settled,  however,  not  a  single  principle ;  wliile  the  sanction 
given  to  the  errors  which  it  contained,  by  the  great  names  of 
those  by  whom  it  was  prepared,  has  been  one  of  the  most 
formidable  obstacles  to  the  progress  of  monetary  science. 

The  opinions  of  contemporaneous  writers  confirm  in  a  strik- 
ing manner  the  conclusions  in  the  preceding  paragraph  as  to 
the  meaning  and  effect  of  the  Bullion  Report.  In  1802,  pend- 
ing the  Restriction  Act,  Mr.  Henry  Thornton,  afterwards  a 
member  of  the  Bullion  Committee,  and  an  acknowledged 
authority  in  financial  affairs,  published  "  An  Inquiry  into  the 
Nature  and  Effect  of  the  Public  Credit  of  Great  Britain,"  in 
which  he  draws  the  following  comparison  between  the  nature 
of  real  and  fictitious  bills  :  — 

"  They  agree,  inasmuch  as  each  is  a  discountable  article  ;  each  has 
also  been  created  for  the  purpose  of  being  discounted  ;  and  each 
is,  perhaps,  discounted  in  fact.  Each,  therefore,  serves  equally  to 
supply  means  of  speculation  to  the  merchant.  So  far,  moreover, 
as  bills  and  notes  constitute  what  is  called  the  circulating  medium, 
or  paper  currency,  of  the  country  (a  topic  which  shall  not  be  here 
anticipated),  and  prevent  the  use  of  guineas,  the  fictitious  and  the 


HENRY   THORNTON.  215 

real  bills  are  upon  an  equality  ;  and,  if  the  price  of  commodities  be 
raised  in  {proportion  to  the  quantity  of  paper  currency,  the  one 
contributes  to  that  rise  exactly  in  the  same  manner  as  the  other.  .  .  . 

"  In  order  to  justify  the  supposition  that  a  real  bill  (as  it  is 
called)  rei^resents  actual  property,  there  ought  to  be  some  i)o\ver  in 
the  bill-holder  to  prevent  the  property  which  the  bill  represeiits 
from  being  turned  to  other  purposes  than  that  of  paying  the  bill  in 
question.  No  such  power  exists  :  neither  the  man  who  holds  the 
real  bill,  nor  the  man  who  discounts  it,  has  any  property  in  the 
specific  goods  for  which  it  was  given  ;  he  as  much  trusts  to  the  gen- 
eral ability  to  pay  of  the  giver  of  the  bill  ns  the  holder  of  any  ficti- 
tious bill  does.  The  fictitious  bill  may,  in  many  cases,  be  a  bill 
given  by  a  person  having  a  large  and  known  capital,  a  part  of 
which  the  fictitious  bill  may  be  said,  in  that  case,  to  represent. 
The  supposition  that  real  bills  represent  property,  and  that  fictitious 
bills  do  not,  seems,  therefore,  to  be  one  by  which  more  than  justice 
is  done  to  one  of  these  species  of  bills,  and  something  less  than 
justice  to  the  other.  .  .  . 

"  A  fictitious  bill,  or  bill  of  accommodation,  is  evidently,  in  sub- 
stance, the  same  as  any  common  promissory  note ;  and  even 
better,  in  this  respect,  that  there  is  but  one  security  to  the  promis- 
sory note,  whereas  in  the  case  of  the  bill  of  accommodation  there 
are'  two."  ^ 

If  Thornton  had  taken  the  pains  to  inquire  into  the  effects 
produced  by  the  use  of  a  currency  based  upon  fictitious  bills, 
in  comparison  with  one  based  upon  bills  representing  merchan- 
dise, he  would  readily  have  discovered  the  wide  difference 
between  the  two.  He  saw  no  necessity  for  this,  for  the  reason 
that  he  held,  with  the  Economists,  that  paper  money  was 
an  "  instrument  of  commerce  "  of  which  value  was  no  neces- 
sary attribute.  That  which  has  preceded,  however,  shows 
the  absurdity  of  his  assumption,  that  fictitious  bills  as  well 
as  those  representing  transactions  in  merchandise  are  equally 
"  discountable  articles."  ^ 

1  Inquiry  into  the  Nature  and  Effect  of  the  Public  Credit  of  Great  Britain, 
Chap.  ii. 

2  It  is  hardly  necessary  to  notice,  at  any  length,  Lord  King's  pamphlet, 
"  Thoughts  on  the  Restriction  of  Specie  Payments  by  the  Bank  of  England," 
published  in  1803.  Lord  King,  as  is  well  known,  acquired  no  little  celebrity  by 
refusing  to  receive  the  notes  of  the  Bank  from  his  tenants,  except  at  their  value 
in  coin.  This  act,  which  was  considered  as  in  the  highest  degree  disloyal,  in- 
volved him  at  the  time  in  great  odium.  His  pamphlet  opens  with  the  following 
statement  of  the  laws  of  money,  taken  from  Adam  Smith  :  — 

"  The  use  of  a  paper  currency  in  any  particular  country,  so  far  as  it  displaces 
coin  which  would  otherwise  be  employed,  diminishes  the  demand  for  gold  and 
silver  for  the  purpose  of  coinage,  and  has  precisely  the  same  effect  in  reducing 
their  general  value  a§  an  actual  increase  of  their  quantity  to  the  same  amount. 
On  the  supposition,  therefore,  of  the  whole  quantity  of  gold  and  silver  remain- 


216  HISTOPwY   OF   MONETARY   THEORIES. 

A  far  more  important  illustration,  however,  of  the  meaning 
conveyed  or  intended  to  be  conveyed  by  the  Bullion  Report, 
is  to  be  found  in  an  elaborate  essay  in  its  vindication  by  Mr. 
William  Huskisson,  a  member  of  the  Committee,  and  published 
almost  simultaneously  with  the  report.  His  essay  opens  with 
the  following  definition  of  the  nature  and  laws  of  money  :  — 

"  The  various  definitions  of  the  word  '  money,'  and  the  different 
acceptations  in  which  the  word  is  used  in  the  ordinary  transactions 
of  life,  have  contributed  to  produce  much  of  the  doubt  and  un- 
certainty which  prevail  at  this  moment  respecting  the  state  of  our 
cuiTcncy. 

"  Money,  in  the  popular  sense,  is  frequently  considered  as  hav- 
ing no  other  value  than  one  purely  arbitrary  and  conventional. 
It°is  sometimes  defined  to  be  the  representative  of  all  other  com- 
modities, and  sometimes  the  common  measure  of  them.  These 
definitions  are  both  incomplete  as  applied  to  money  ;  because  they 
are  equally  appUcable  to  every  description  of  currency,  whether 
consisting  of  the  precious  metals,  of  paper,  or  of  any  other  article. 

"  It  is  of  tlie  essence  of  money  to  possess  intrinsic  value. 

"  The  quality  of  representing  "commodities  does  not  necessarily 
implv  intrinsic  value  ;  because  that  quality  may  be  given  either  by 
confidence  or  by  authority.  The  quality 'of  being  a  common  meas- 
ure does  not  necessarily  imply  intrinsic  value,  any  more  than  the 
possession  of  a  foot-rule  entitles  us  to  the  power  of  acquiring  what- 
ever it  enables  us  to  measure.  Money,  or  a  given  quantity  of  gold 
or  silver,  is  not  only  the  common  measure  and  common  rep- 
resentative of  all  other  commodities,  but  also  the  common  and 
universal  equivalent. 

"  Paper  currency  has,  obviously,  no  intrinsic  value. 

"  A  promissory  note,  under  whatever  form,  or  from  whatever 
source  it  may  issue,  represents  value.  It  does  so,  in  as  much  as  it 
is  an  undertaking  to  pay,  in  money,  the  sum  for  which  it  is  issued. 

"  The  money,  or  coin  of  a  country,  is  so  much  of  its  capital. 
Paper  currency  is  no  part  of  the  capital  of  a  country :  it  is  so 
much  circulatinof  credit. 

"  Whoever  buys,  gives,  whoever  sells,  receives,  such  a  quantity 
of  pure  gold  or  silver  as  is  equivalent  to  the  article  bought  or 
sold ;  or,  if  he  gives  or  receives  paper  instead  of  money,  he 
gives  or  receives  that  which  is  valuable  only  as  it  stipulates  the 

ing  the  same,  they  must  in  a  certain  degree  be  rendered  cheap  by  every  increase 
of  paper  currency.  It  must,  however,  be  evident  tliat  the  advantages  which 
do  result  from  the  use  of  a  paper  currency  depend  upon  its  exactly  supplying 
the  place  of  the  coin  it  represents.  This  quality  can  be  only  possessed  by 
a  currency  which  is  immediately  convertible  into  specie  at  the  option  of  the 
holder."     (pp.  2-5.) 

This  preface  was  followed  by  a  temperate  argument  against  the  Restriction 
Act,  wholly  inconclusive,  from  the  writer's  ignorance  of  the  laws  upon  which  a 
convertible  currency  must  rest.  His  protest,  notwithstanding,  had  a  value  in 
helping  to  keep  up  a  spirit  of  opposition  to  the  Restriction  Act,  which  finally 
ended  in  its  repeal. 


"VTILLIA^r  HUSKISSOX.  217 

payment  of  a  given  quantity  of  gold  or  silver.  So  long  as  this 
engagement  is  punctually  fulfilled,  paper  will,  of  course,  pass  current 
with  the  coin  with  which  it  is  thus  constantly  interchangeable. 
Both  money,  therefore,  and  paper  promissory  of  money,  are  com- 
mon measures  and  representatives  of  the  value  of  all  commodities. 
But  money  alone  is  the  universal  equivalent ;  paper  currency  is 
the  representative  of  that  money. 

"  Of  paper  currency,  however,  there  are  two  sorts :  the  one  rest- 
ing upon  confidence,  the  other  upon  authority.  Paper  resting 
upon  confidence  is  what  I  have  described  as  circulating  credit,  and 
consists  in  engagements  for  the  payment,  upon  demand,  of  any 
specific  sums  of  money  ;  which  engagements,  from  a  general  trust 
in  the  issuers  of  such  paper,  they  are  enabled  to  substitute  for 
money  in  the  transactions  of  the  community.  Paper  resting 
upon  authority  is  what,  in  common  language,  is  called  paper 
money  ;  and  consists  of  engagements  issued  or  circidated  under 
the  sanction,  and  by  the  immediate  intervention,  of  the  public 
jDower  of  the  State."  ^ 

The  quality  of  representing  commodities  cannot  be  given 
either  by  confidence  or  autbority.  That  a  person  believes  that 
a  note  wbicb  be  takes  represents  commodities  does  not  make 
it  the  representative  of  tbem,  any  more  than  the  belief  of  the 
Alchemists  made  the  baser  metals  in  combination  the  represen- 
tatives of  gold,  into  wbich  they  so  long  sought  to  convert  them. 
If  confidence  would  create  values,  the  silliest  dimce  would  be 
the  Croesus  of  the  race.  ••  "Why  not  authority?  "  it  is  asked. 
"  Government  can  declare  that  a  foot-rule  shall  have  the 
capacity  of  measuring  extension.  Why  may  it  not  declare 
that  a  bank-note  shall  have  the  capacity  of  measuring  value  ? 
Intrinsic  value  is  no  more  necessary  in  one  case  than  in  the 
other."  But  would  the  owners  of  estates  accept  in  their 
sale  the  instruments  by  wbicb  their  areas  were  measured  ? 
They  might  receive  the  surveyor's  chains  at  their  value  as 
"  scrap-iron,"  but  in  no  other  way.  "When  men  buy  and  sell, 
tbey  exchange,  or  intend  to  exchange,  articles  possessing  equal 
values.  It  is  astonishing  that  Huskisson  could  have  allowed 
bimself  'to  be  taken  captive  by  the  theories  or  statements 
which  he  found  in  the  books  ;  which,  upon  the  slightest  examin- 
ation, would  have  vanished  in  empty  air.  With  all  bis  acute- 
ness,  be  did  not  get  an  inch  beyond  Smith's  "  instrument  of 
commerce," — bis  "wheel"  the  value  of  which  bore  no  rela- 
tion whatever  to  the  value  of  the  articles  moved  by  it. 

1  Question  Concerning  the  Depreciation  of  our  Currency,  pp.  1-3. 


218  HISTORY   OF   MONETARY   THEORIES. 

"  If  the  circulation,"  continues  Huskisson,  "  of  any  country  were 
performed  exclusively  by  gold,  for  instance,  and  the  supply  of  that 
metal  in  any  such  country  were,  from  any  imaginable  cause, 
doubled,  whilst  the  quantity  of  gold  and  the  demand  for  it 
should  continue  the  same  in  all  other  markets  of  the  world,  the 
value  of  gold  in  such  country  would  be  diminished.  This  diminu- 
tion in  the  value  of  gold  would  appear  in  the  proportionate  rise  of 
all  commodities ;  but  gold,  being  so  much  cheaper  in  the  country 
in  which  its  quantity  had  been  increased,  it  would  be  bought  by 
other  countries,  and  exported  from  that  country  till  its  value  was 
restored  again  to  a  level  in  the  different  parts  of  the  world. 

"  If  the  circulation  of  a  country  were  supplied  parti v  by  gold 
and  partly  by  paper,  and  the  amount  of  that  circulation  were 
doubled  by  an  augmentation  of  that  paper,  the  effect  u))on  prices 
at  home  would  be  the  same  as  in  the  former  case  ;  but  gold  not 
becoming,  by  this  augmentation  of  currency,  more  abundant  in 
such  country  than  in  other  parts  of  the  world,  as  a  commodity  its 
relative  value  to  otlier  commodities  would  remain  unaltered.  As 
a  commodity  also,  its  price  would  rise  in  the  same  proportion  as 
that  of  other  commodities ;  although,  in  the  state  of  coin  of  which 
the  denomination  is  fixed  by  law,  it  could  only  pass  current  accord- 
ing to  that  denomination. 

"  When  paper  is  thus  augmented  in  any  country,  the  exportation 
of  the  gold  coin,  therefore,  will  take  place ;  not  because  gold,  as  a 
commodity,  is  become  more  abundant  and  less  valuable  with  refer- 
ence to  other  commodities  in  such  country,  but  from  the  circum- 
stance of  its  value  as  currency  i-emaining  the  same,  while  its  price 
in  that  currency  is  increased  in  common  with  the  prices  of  all 
other  commodities.  So  far  as  such  exjjortation  takes  place,  the 
diminution  which  it  effects  in  the  total  amount  of  the  cui-rency  has  a 
tendency  to  support  the  value  of  the  remainder,  just  as  much,  and 
for  the  same  reason,  as  if,  in  the  case  of  the  circulation  consisting 
wholly  of  gold,  first  an  augmentation,  and  then  an  exportation  to 
the  same  amount,  had  taken  place,  according  to  the  first  supposition. 
"  An  excess  of  paper  has,  in  the  first  instance,  the  same  effect 
upon  prices  as  an  excess  of  the  precious  metals,  to  the  same 
amount,  would  have,  in  any  particular  country.  But  it  does  not 
admit  of  the  same  relief:  it  cannot  right  itself  by  exportation. 
"  The  currency  of  a  country,  then,  is  depreciated,  — 
"  1.  If  its  standard  coin  contain  less  of  gold  or  silver  than  it  is  cer- 
tified to  contain.  In  that  case,  the  paper,  as  representing  the  coin, 
is  also  depreciated,  and  precisely  in  the  same  degree  as  thti  coin. 

"  2.  If  the  standard  coin  being  of  full  weight,  and  the  paper  which 
represents  that  standard  coin,  and  is,  or  purports  to  be,  exchangeable 
for  it,  is  not  exchangeable,  at  the  same  time,  for  so  large  a  quantity 
of  gold  or  silver  as  is  contained  in  the  coin  which  it  represents. 
In  that  case,  the  coin,  though  undiminished  in  value,  must,  as  part 
of  the  currency,  partake  of  the  depi'eciation  of  the  whole. 

"  Consequently,  if  the  coin  be  itself,  as  coin,  depreciated,  the 
paper  whicli  circulates  with  it  cannot  be  otherwise  than  depreciated 
to  the  same  degree.     But  if  the  coin  be  undepreciated  as  coin,  and 


WILLIAM   HUSKISSON.  219 

there  bo,  notwithstanding,  a  depreciation  of  the  general  currency, 
the  cause  of  that  depreciation  can  only  be  in  the  paper;  and  that 
cause  can  be  no  other  than  the  excess  in  which  that  paper  is 
issued."  ^ 

In  the  case  supposed,  where  the  currency  was  supplied 
partly  by  gold  and  partly  by  paper,  and  the  two  were  of 
equal  value,  the  latter  must  have  been  symbolic.  If  such  a 
currency  be  doubled,  the  whole  increase  being,  as  Huskisson 
assumes,  of  the  kind  previously  in  circulation,  there  would  be 
no  inflation.  Prices  would,  in  reference  to  money,  remain 
unchanged.  So  long  as  gold  and  paper  possessed  the  same 
value,  an  increase,  or,  rather,  an  inflation,  of  the  currency, 
would  not  inflate  or  increase  the  price  of  gold  bullion,  —  gold 
as  merchandise,  —  while  it  might  increase  the  value  of  all 
other  kinds  of  merchandise,  for  the  very  good  reason  that  gold 
cannot  rise  in  value  in  reference  to  itself ;  that  is,  a  sovereign 
after  the  inflation  would  purchase  the  same  amount  of  bullion 
as  before.  Huskisson  took  precisely  the  ground  of  Lowndes, 
who  would  "  raise  the  value  of  silver  in  the  coins  to  the  foot 
of  6s.  Sd.  in  every  crown,  because  the  price  of  standard 
silver  in  bullion  had  risen  to  6s.  5d.  the  ounce."  This  was 
the  very  proposition  that  Locke  was  at  such  pains  to  refute, 
—  that  the  value  of  silver  cannot  rise  in  reference  to  silver. 
Huskisson's  assertion  was  only  the  old  impossibility  over 
again. 

So  long  as  coin  would  purchase  no  more  than  an  equal  nom- 
inal amount  of  paper,  gold  would  have  no  more  tendency  to 
go  abroad  than  before  such  increase.  Indeed,  its  tendency 
would  be  inward  to  provide  adequate  reserves  for  the  increase 
of  paper.  If  the  currency  were  inflated,  that  is,  if  it  did  not 
to  its  full  extent  represent  merchandise  other  than  gold,  it 
might  still  remain  at  par  with  gold,  provided  the  parties  who 
issued  it  possessed  sufficient  reserves.  If  adequate  provision, 
either  in- merchandise  or  coin,  were  not  made  for  its  redemp- 
tion, it  would  become  depreciated :  it  would  not  be  exchange- 
able for  an  equal  quantity  of  gold,  nor  would  it  command  an 
equal  amount  of  merchandise  with  gold,  no  matter  whether  it 
rested  upon  confidence  or  authority.  The  value  of  gold  would 
not  be  influenced  in  any  degree  by  the  amount  or  value  of  the 
paper  outstanding.     That  of  the  former  would  still  depend 

i  Question  Concerning  the  Depreciation  of  our  Currency,  pp.  26-29. 


220  HISTORY   OF    MONETARY   THEORIES. 

•upon  cost :  that  of  tlie  latter,  upon  cost  and  demand.  If  the 
latter  rested  upon  confidence,  its  depreciation  ■v\-ould  tend  to 
bring  gold  into  the  country ;  for  it  would  be  disused  so  soon  as 
a  currency  that  was  not  depreciated  could  be  got  to  fill  its 
place.  Currency  resting  upon  confidence  that  is  depreciated 
always  speedily  goes  out  of  circulation.  If  it  rested  upon 
authority,  which  was  really  the  fact  with  regard  to  the  Bank  of 
England  currency  during  the  suspension,  and  was  issued  in 
very  large  amounts,  it  would,  in  great  measure,  drive  the  coin 
previously  in  circulation  out  of  the  country.  But  this  fact 
would  not  tend,  in  any  degree,  to  raise  the  value  of  the  cur- 
rency "  resting  on  authority."  Its  value  in  exchange  would 
be  its  estimated  value.  The  exportation  of  coin  would  tend 
to  reduce  the  value  of  such  currency,  instead  of  raising  it,  by 
rendering  it  all  the  more  difficult  to  resume,  from  the  impover- 
ishment of  the  people,  which  would  be  measured  by  the  amount 
of  gold  —  capital — that  had  been  drawn  from  them.  Hus- 
kisson's  assumptions,  therefore,  in  whatever  light  viewed,  are 
exactly  opposed  to  the  fact.  It  is  wholly  beyond  the  power  of 
government  to  create  the  values  upon  which  a  currency  must 
rest,  except  in  the  manner  already  described.  If  it  be  com- 
petent for  it  to  make  its  notes  legal  tender,  then  they  may, 
for  a  time,  have  a  value  for  those  who  can  use  them  exceed- 
ing their  intrinsic  value.  But  such  accidental  value  would  be 
lost  so  soon  as  the  contracts  existing  at  the  time  of  their  issue 
were  discharged. 

As  money  resting  upon  confidence  or  authority  was  with 
Huskisson  equally  a  measure  of  value  ^vith  gold,  the  decline 
in  the  value  of  the  former,  from  whatever  cause,  carried  down, 
and  equally,  the  price  of  the  latter  ;  for  the  reason  that  one  com- 
petent measure  of  value  must  be  equal  in  potency  or  effect  to 
any  other  competent  measure.  This  is  the  way  he  reasoned 
in  an  essay  the  whole  scope  and  object  of  which  was  to  prove 
the  exact  opposite,  —  that  the  paper  money  of  the  country, 
though  declared  to  have  a  value  equal  to  that  of  an  equal 
nominal  amount  of  gold,  did  not  possess  such  value  ;  that  the 
values  of  the  two,  though  equally  supported  by  authority,  had 
no  necessary  relation  the  one  to  the  other  ;  and  that  their  wide 
divergence  was  well  calculated  to  excite  the  most  profound 
alarm.  He  could  not  go  into  the  market  to  make  any  purchase, 
without  having  thrust  into  his  hand  two  scales  of  prices, — 


DAVID    RICARDO.  221 

one  in  paper,  the  other  in  gold  ;  yet,  in  the  face  of  all  this,  he 
was  so  tied  to  tradition  as  to  assert  that  money  resting  npon  au- 
thority—  the  assignats  of  France  and  the  Revolutionary  Cur- 
rency of  the  United  States  —  was  as  competent  a  measure 
of  values  as  gold  and  silver. 

Immediately  following  Huskisson,  but  of  much  greater  rep- 
utation and  influence  upon  the  subject  of  money,  and  whose 
writings  reflected  far  more  vividly  the  ideas  of  the  Bullion 
Committee,  was  the  celebrated  David  Ricardo,  the  author  of 
several  works   upon   money  and   kindred  subjects,  who  has 
always  been  one  of  the  great  authorities  in  Political  Economy. 
He  was  actively  engaged  in  business  as  a  banker  during  almost 
the  whole  period  of  the  restriction.     In  1809,  he  published  a 
"  Treatise  on  the  Price  of  Bullion  ;  "  in  1816,  "  Proposals  for 
an  Economical  and  Secure  Currency ; "  and,  in  1817,  his  great 
work  entitled  "  The  Principles  of  Political  Economy  and  Tax- 
ation," esteemed  by  the  Economists  to  be  the  most  important 
treatise  on  that  science,  with  the  single  exce]3tion  of  Smith's 
"  Wealth  of  Nations."     As  he  was  a  member  of  Parliament, 
and  took  a  leading  part  in  the  debates  on  the  Restriction  Act, 
his  writings  are  of  especial  value  as  illustrating  the  opinions 
prevailing  at  the  time.     He  is  the  central  figure  among  the 
later  school  of  Economists,  as  Smith  is  among  the  old.     The 
latter  lived  almost  wholly  in  an  ideal  world.     The  former  was 
as  wanting  in  ideas  as  the  latter  in   knowledge    of  affairs. 
Accepting  without  reservation  the  theory  of  Smith,  that  value 
was  not  a  necessary  attribute  of  money,  Ricardo  was  driven  to 
explain  the  principle  on  which  it  circulated.     He  made  short 
work  of  it,  by  declaring  that  money  became  such  by  virtue  of 
the  insignia  of  government ;  that  its  value  was  in  ratio  to  its 
quantity,  —  that  the  most  worthless  pieces  of  paper,  or   the 
most  debased  coin,  might  be  raised  to  the  highest  pitch  of  value 
simply  by  limiting  their  amount.     In  the  same  way,  as  will  be 
hereafter  seen,  when  called  upon  to  reconcile  Smith's  doctrines 
of  Free-Trade  with  the  apparent  necessity  for  Protection,  he 
invented  a  dogma,  which,  so  far  as  the  doctrine  of  rent  is  con- 
cerned, is  now  universally  accepted,  —  that  prices  are  regulated 
by  the  least  and  not  by  the  most  favored  of  producers  ;  that 
the  least  favored  is  certain  of  a  profit,  although  far  below  that 
of  the  most  favored  ;    and,  consequently,  that  the  value  or 
price  of  merchandise  depends  upon  cost  alone. 


222  HISTORY  OF   MONETARY    THEORIES, 

"The  quantity  of  money,"  he  says,  "that  can  be  employed  in 
any  country  must  depend  upon  its  value.  ...  A  circulation  can 
never  be  so  abundant  as  to  overflow ;  for,  by  diminishing  its  value, 
you  will  in  the  same  proportion  increase  its  quantity,  and,  by  in- 
creasing its  value,  diminish  its  quantity.  .  .  . 

"  While  the  State  coins  money,  and  charges  no  seigniorage,  money 
will  be  of  the  same  value  as  any  other  piece  of  the  same  metal  of 
equal  weight  and  fineness  ;  but,  if  the  State  charges  a  seigniorage 
for  coinage,  the  coined  piece  of  money  will  generally  exceed  the 
value  of  the  uncoined  piece  of  metal  by  the  whole  seigniorage 
charged,  because  it  will  require  a  greater  quantity  of  labor,  or, 
which  is  the  same  thing,  the  value  of  the  produce  of  a  greater 
quantity  of  labor,  to  procure  it. 

"  While  the  State  alone  coins,  there  can  be  no  limit  to  this  charge 
of  seigniorage  ;  for,  by  limiting  the  quantity  of  coin,  it  can  be  raised 
to  any  conceivable  value,     ■ 

"It  is  on  this  principle  that  paper  money  circulates:  the  whole 
charge  for  paper  money  may  be  considered  as  seigniorage.  Thouoh 
it  has  no  intrinsic  value,  yet,  by  limiting  its  quantity,  its  value  in 
exchange  is  as  great  as  an  equal  denomination  of  coin  or  of  bullion 
in  that  coin.  On  the  same  principle,  too,  namely,  by  a  limitation  of 
the  quantity,  a  debased  coin  would  circulate  at  the  value  it  should 
bear  if  it  were  of  the  legal  weight  and  fineness,  not  at  the  value  of 
the  quantity  of  metal  which  it  actually  contained.  .  .  . 

"After  the  establishment  of  Banks,  the  State  has  not  the  sole 
poAver  of  coining  or  issuing  money.  The  currency  may  as  effectu- 
ally be  increased  by  paper  as  by  coin  :  so  that  if  a  State  were  to 
debase  its  money,  and  diminish  its  quantity,  it  could  not  support  its 
value ;  because  the  Banks  would  have  an  equal  power  of  adding  to 
the  wliole  quantity  of  circulation. 

"On  these  principles,  it  will  be  seen  that  it  is  not  necessary  that 
paper  money  should  be  jiayable  in  specie  to  secure  its  value  :  it  is 
only  necessary  that  its  quantity  should  be  regulated  according  to 
the  value  of  the  metal  which  is  declared  to  be  its  standard.  If  the 
standard  were  gold  of  a  given  weight  and  fineness,  paper  might  be 
increased  with  every  fall  In  the  value  of  gold,  or,  which  is  the  same 
thing  in  its  effects,  with  every  rise  in  the  price  of  goods  .  .  . 

"  l)r.  Smith  appears  to  have  forgotten  his  own  principle  in  his 
argument  on  colony  currency.  Instead  of  ascribing  the  depreci- 
ation of  that  paper  to  its  too  great  abundance,  he  asks  whether, 
allowing  the  colony  security  to  be  perfectly  good,  a  hundred  pounds 
payable  fifteeji  years  hence  would  be  equally  valuable  with  a 
hundred  pounds  to  be  paid  immediately.  I  answer,  Yes,  if  it  be 
not  too  abundant. 

"  Experience,  however,  shows  that  neither  a  State  nor  a  Bank  ever 
have  had  the  unrestricted  power  of  issuing  paper  money,  without 
abusing  that  power.  In  all  States,  therefore,  the  issue  of  paper 
moneyought  to  be  under  some  check  and  control ;  and  none  seems 
60  proper  for  that  purpose  as  that  of  subjecting  the  issuers  of  paper 
money  to  the  obligation  of  paying  their  notes,  either  in  gold  coin  or 
bullion. 

"A  currency  is  in  its  most  perfect  state  when  it  consists  wholly 


DAVID   RICARDO.  223 

of  paper  money,  but  of  paper  money  of  an  equal  value  with  the  gold 
which  it  professes  to  represent.  The  use  of  paper  instead  of  gold 
substitutes  the  cheapest  in  place  of  the  most  expensive  medium, 
and  enables  the  country,  without  loss  to  any  individual,  to  exchange 
all  the  gold  which  it  before  used  for  this  purpose,  for  raw  materials, 
utensils,  and  food,  by  the  use  of  which  both  its  wealth  and  its  en- 
joyments ai-e  increased."  ^ 

Suppose  government  to  charge  nine  sovereigns  for  coining 
one,  —  that  is,  that  for  metal  equal  in  weight  to  ten,  it  should 
retiu'n,  to  the  party  bringing  it  to  the  mint,  only  one,  the 
insignia  affixed  to  the  coin  declaring  that  it  should  have  a 
value  in  exchanges  equal  to  ten  times  the  amount  of  the 
metal  it  contained,  —  could  such  declaration  make  the  ex- 
changeable value  of  the  coin  equal  to  its  nominal  value? 
Ricardo  replies,  "  Yes,  for  the  public  must  have  money  — 
must  have  yardsticks  and  scales  —  or  their  operations  must 
cease."  But  if  government  should  offer  to  return  in  coin  only 
one-tenth  of  the  metal  received,  no  one  would  take  bullion  or 
dust  to  it.  The  metal  would  be  ]3rivately  assayed,  and  would 
pass  by  weight.  A  person  possessing  bullion  might  wish  to 
sell  it  for  use  in  the  arts,  or  for  the  purchase  of  foreign  com- 
modities ;  for  which  it  would  be  received  at  its  full  value.  If 
government  should  persist  in  returning  only  one-tenth  of  the 
metal  in  the  form  of  coin,  its  action  might  cause  no  little  in- 
convenience ;  but  great  commercial  communities  existed  long 
before  coinage  was  invented.  The  inconvenience  resulting 
from  the  want  of  coinage,  relative  to  the  magnitude  of  the 
transactions  taking  place,  would  be  much  less  now  than  before 
the  invention  or  use  of  symbolic  money ;  for  the  reserves 
necessary  for  the  conversion  of  such  currency  may  be  in  the 
form  of  bullion,  nearly  as  well  as  in  that  of  coin.  They  are 
now  largely  held  in  bullion.  Government  can  create  debts 
which  have  a  value  equal  to  that  which  is  to  be  eventually 
paid,  less  the  charge  for  interest  for  forbearance  of  present 
payment ;  but  it  can  no  more  create  values  by  its  insignia 
without  an  obligation,  than  the  Alchemist  could  create  gold  out 
of  curious  and  fanciful  combinations  of  the  baser  metals. 

Paper  money  with  Ricardo  having  necessarily  no  intrinsic 
value,  and  his  assumption  having  become  a  dogma  with  the 
modern  school,  the  only  question  really  involved  in  the  discus- 

1  Principles  of  Political  Economy  and  Taxation,  Chapter  xxv. 


224  HISTORY  OF   MONETARY   THEORIES. 

sion  which  followed  has  been  that  of  quantity.   As  governments 
were  the  proper  parties  to  coin  metals,  they  were,  by  necessary 
inference,    the   proper   parties   to   issue   paper.      Experience, 
however,  proved  that   they  were   not   to   be   trusted   where 
the  temptation  was  so  great.     Their  necessities,  real  or  fancied, 
would   always   be   pushing   them   beyond  the   proper    limit. 
Paper  money,  therefore,  was  to  be  issued  by  private  parties 
or  bankers,  who  were  always  to  be  under  the  check  of  its  con- 
version into  coin.     If,  for  example,  a  currency  of  £50,000,000, 
consisting  of  X30,000,000  of  paper  and  £20,000,000  of  coin, 
sufficed  for  the  wants  of  a  community  in  their  exchanges,  and 
an  addition  to  it  of   £10,000,000  of  paper,  no  matter  how 
issued,  were  made,  —  the  currency  would  be  in  excess ;  and  that 
portion  of  it  consisting  of  gold,  being  the  only  part  of  it  that 
was  exportable,  would  seek  other  markets  m  which  the  cur- 
rency was   in  less   relative   abundance.     If   the   addition   of 
£10,000,000  in  the  case  assumed  were  convertible  into  coin,  it 
would  be  drawn,  in  order  to  supply  the  export  demand.     This 
demand  would  continue  till  equilibrium  was  restored  ;  that  is, 
till  the  amount  of  currency  was  reduced  to  that  required  by 
the  community  in  their  transactions,  —  to  the  original  sum  of 
£50,000,000.   Provided  the  parties  issuing  the  excess  were  able 
to  take  in  their  notes  on  demand,  all  aberrations  in  the  volume 
of  the  currency  would  correct  themselves.     Convertibility  of 
paper  at  all  times  into  coin,  consequently,  was  the  only  certain 
test  of  the  propriety  of  its  issue. 

But  convertibility  of  issue  may  have  no  relation  whatever 
to  propriety  of  issue.  A  person  may  be  able  to  pay  a  bill 
he  has  uttered  ;  but  by  doing  so  he  may  strip  himself  of  every 
dollar  he  possesses.  The  question,  therefore,  far  in  advance  of 
convertibility,  and  which  is  the  only  one  important  to  be  con- 
sidered, is  the  manner  in,  or  cost  at  wliich,  convertibility  is 
sought  to  be  secured.  The  notes  of  the  Bank  of  England 
have  been  uninterruptedly  convertible  for  the  last  fifty-five 
years ;  yet  the  fear  that  they  might  not  be  convertible  has, 
during  that  whole  period,  kept  the  public  mind  in  constant 
agitation,  and  has  often  culminated  in  panics  which  carried 
ruin  and  dismay  throughout  the  land.  The  spectre  has  yet 
lost  none  of  its  terror  or  power  to  harm.  How  to  create  a 
currency  which  shall  at  all  times  be  convertible  without  draw- 
ing capital  from  its  issuers,  and  without  creating  disturbance  in 


DAVID   EICAEDO.  225 

monetary  and  financial  circles,  is  a  problem  no  nearer  solution 
than  it  was  a  hundred  years  ago.  The  principles  on  which  all 
commercial  currencies  must  be  based,  as  set  out  in  the  first  part 
of  tills  work,  have  only  to  be  referred  to,  to  place  the  whole 
subject  in  a  light  to  command  universal  assent.  Where  bills 
are  discounted,  obligations  are  mutually  created  ;  and,  so  long 
as  such  bills  represent  merchandise  entering  into  consumption, 
their  payment  is  certain  to  return  to  the  Bank  its  obligations, 
without  the  withdrawal  of  any  considerable  portion  of  its 
means.  So  long  as  such  rule  is  followed,  so  long  as  a  currency 
is  issued  only  in  the  discount  of  bills  representing  merchan- 
dise, there  can  be  no  inflation ;  nor  is  there  any  danger  that  the 
Bank  issuing  it  will  be  called  upon  for  any  considerable 
amount  of  coin.  No  ordinary  alarm  can  take  the  notes  so 
issued  out  of  the  channels  of  circulation,  so  that  they  will  be 
presented  for  payment  in  coin.  But  so  soon  as  the  Bank 
ceases  to  discount  bills,  and  puts  its  means,  whatever  they  may 
be,  into  governments  —  into  consols,  it  alone  undertakes  to  take 
in  its  own  currency ;  and  it  may  be  laid  down  as  an  axiom  in 
monetary  science,  that  unless  provision  be  made  for  the  retire- 
ment of  a  currency  without  any  act  of  the  issuer,  it  is  certain 
to  involve  both  himself  and  th^  public  in  great  embarrassment 
and  loss,  and  the  former,  perhaps,  in  absolute  ruin.  The  only 
proper  mode  of  issuing  a  currency  is  that  which  shall  provide 
for  its  retirement  automatically,  by  the  operation  of  the  laws 
of  trade,  —  by  the  debtors  of  the  Bank,  instead  of  the  Bank 
itself.  That  such  mode  of  issue  has  never  yet  been  made  the 
subject  of  discussion  by  the  Economists,  is  a  sufficient  ex]3la- 
nation  of  the  utter  want  of  progress  in  monetary  science. 

It  has  already  been  sufficiently  shown,  that  in  all  exchanges, 
equivalents,  or  what  are  assumed  to  be  equivalents,  are  ex- 
changed ;  that  when  one  of  the  subjects  of  exchange  is  a 
promise  or  undertaking  of  government,  its  price  is  its  real  or 
estimated  value ;  and  that  the  insignia  of  government,  unless 
they  carry  with  them  some  obligation,  are  of  no  value.  A  gov- 
ernment currency,  which  may  at  first  have  a  value  in  coin 
nearly  equal  to  its  nominal  value,  may  become  wholly  value- 
less ;  but  its  price  at  any  given  time  is  to  be  accepted  as  its 
value.  In  other  words,  money  will  no  more  be  taken  but  at 
its  value  than  any  other  kind  of  merchandise  or  property. 
This  may,  like  that  of  all  other  kinds,  be  overestimated ;  the 

15 


226  HISTORY  OF  MONETARY   THEORIES. 

market  price  of  any  article,  however,  at  any  one  time,  must 
always  be  considered  to  measure  its  value.  Ricardo,  however, 
with  the  Economists,  held  value  to  be  no  attribute  of  money ; 
but  that  it  was  an  instrument  of  commerce  precisely  in  the 
same  manner  that  scales  or  balances  are  instruments  of  com- 
merce, the  value  of  both  depending  upon  their  quantity. 
If  only  one  set  of  scales  were  allowed  to  be  used,  if  the  weight 
of  all  merchandise  entering  into  commerce  were  to  be  ascer- 
tained by  it,  it  might  to  its  possessor  have  an  almost  fabulous 
value,  as  all  would  have  to  use  it  upon  his  own  terms.  If 
Ricardo  be  correct,  then  pro^dded  there  be  but  one  shilling  in 
the  world,  and  that  a  debased  one,  its  value  might  be  equal 
to  all  the  money  in  it  at  the  present  time.  If  he  be  correct, 
then  the  debasement  of  a  currency,  provided  its  nominal 
amount  be  not  increased,  is  the  wisest  possible  policy  both  for 
princes  and  people. 

"In  a  national  point  of  view,"  continues  Ricardo,  "it  is  of  no 
importance  whether  the  issuers  of  this  well-reguhited  paper  money 
be  the  government  or  a  Bank ;  it  will  on  the  whole  be  equally  pro- 
ductive of  riches,  Avhether  it  be  issued  by  one  or  by  the  other :  but 
it  is  not  so  with  respect  to  the  interest  of  individuals.  In  a  country 
where  the  market  rate  of  interest  is  7  per  cent,  and  where  the  State 
requires  for  a  particular  expense  a70,000  per  annum,  it  is  a  question 
of  importance  to  the  individuals  of  that  country,  whether  they 
must  be  taxed  to  pay  this  £70,000  per  annum,  or  whether  they  could 
raise  it  without  taxes.  Suppose  that  a  million  of  money  should  be 
required  to  fit  out  an  exj>edition.  If  the  State  issued  a  million 
of  paper,  and  displaced  a  million  of  coin,  the  expedition  would  be 
fitted  out  without  any  charge  to  the  people ;  but  if  a  Bank  issued 
a  million  of  paper,  and  lent  it  to  government  at  7  per  cent,  thereby 
displacing  a  million  of  coin,  the  country  wcnild  be  charged  with  a 
continual  tax  of  £70,000  per  annum.  The  people  would  pay  the  tax, 
the  Bank  would  receive  it,  and  the  society  would  in  either  case  be 
as  wealthy  as  before :  the  expedition  would  have  been  really  fitted 
out  by  the  improvement  of  our  system  ;  by  rendering  capital,  of  the 
value  of  a  million,  productive  in  the  form  of  commodities,  instead 
of  letting  it  remain  unproductive  in  the  form  of  coin.  But  the 
advantage  would  always  be  in  favor  of  the  issuers  of  paper  ;  and,  as 
the  State  represents  the  people,  the  people  would  have  saved  the 
tax,  if  they,  and  not  the  Bank,  had  issued  this  millicm.  .  .  . 

"  It  has  already  been  observed,  that  if  there  were  perfect  security 
that  the  powe'-  of  issuing  paper  money  would  not  be  abused,  it 
could  be  of  no  importance,  with  respect  to  the  riches  of  the 
country  collectively,  by  whom  it  was  issued  ;  and  I  have  now 
shown  that  the  public  would  have  a  direct  interest  that  the  issuers 
should  be  the  State,  and  not  a  company  of  merchants  and  bankers. 


DAVID   KICAEDO.  227 

The  dancjer,  however,  is,  that  this  power  would  be  more  likely  to 
be  abused,  if  in  the  hands  of  government,  than  in  the  hands  of  a 
banking  company.  A  company  would,  it  is  said,  be  more  under 
the  control  of  law ;  and,  although  it  might  be  their  interest  to  ex- 
tend their  issxies  beyond  the  bounds  of  discretion,  they  would  be 
limited  and  checked  by  the  power  which  individuals  would  have  of 
calling  for  bullion  or  specie.  It  is  argued,  that  the  same  check 
would  not  be  long  respected,  if  government  had  the  privilege  of 
issuing  money  ;  that  they  would  be  too  apt  to  consider  present  con- 
venience rather  than  future  security,  and  might,  therefore,  on  the 
alleged  grounds  of  expediency,  be  too  much  inclined  to  remove 
the  checks  by  which  the  amount  of  their  issues  was  controlled. 

"  Under  an  arbitrary  government,  this  objection  would  have 
great  force ;  but  in  a  free  country,  with  an  enlightened  legislature, 
the  power  of  issuing  paper  money,  under  the  requisite  checks  of 
convertibility  at  the  will  of  the  holder,  might  be  safely  lodged  in 
the  hands  of  commissioners  appointed  for  that  special  purpose,  and 
they  might  be  made  totally  independent  of  the  control  of  min- 
isters." ^ 

As  money,  with  Ricardo,  possessed  no  value,  it  was  imma- 
terial wlio  issued  it,  —  government  or  the  Bank.  It  would  in 
either  case  be  equally  productive  of  riches.  Why?  Because 
government  would  pay  nothing  for  its  use,  thereby  saving  the 
people  an  equal  amount  in  taxes,  while  Banks  would  receive 
an  interest  on  that  which  cost  them  nothing.  It  made,  how- 
ever, a  great  difference  to  the  public  who  issued  it ;  for  the 
reason  that  its  issue  by  government  saved  them  an  equal  sum. 
The  saving  effected  by  such  a  currency,  Ricardo  illustrates  by 
the  fitting  out  of  an  expedition,  the  whole  cost  of  which  was 
borne  by  an  issue  of  government  notes.  The  notes  would 
necessarily  be  legal  tender ;  for  the  reason  that,  if  they  bore  no 
interest,  the  people  would  not  willingly  receive  them  on  any 
other  terms.  If  they  bore  interest,  nothing  would  be  saved  to 
the  public.  If  they  were  made  legal  tender,  the  effect  would 
be  to  drive  out  of  the  country  a  corresponding  amount  of 
specie.  The  nation,  consequently,  would  be  so  much  the 
poorer.  It  could  only  pay  its  notes  by  bringing  back  the  coin 
it  had  parted  with.  If  it  repudiated  them,  it  could  not  resume 
its  industries  on  their  wonted  scale  till  the  amount  lost  had  been 
brought  back.  Ricardo  assumed  that  a  nation  might  waste  a 
large  portion  of  its  capital  in  bootless  military  operations,  and 
still  have  the  whole  of  it  in  hand.     He  made  nothing  of  over- 

1  Principles  of  Political  Economy  and  Taxation,  Chap.  xxv. 


228  HISTORY   OF   MONETARY   THEORIES. 

ruling  natural  laws,  in  order  to  give  consistency  to  his  theories 
or  schemes. 

Suppose  the  government  of  the  United  States  to  undertake 
the  issue  of  a  currency  by  a  commission  having  its  office  m 
the  City  of  New  York,  as  the  commercial  centre  of  the  country, 
upon  what  principle  or  rule  would  it  act?  How  would  the 
right  of  a  person  to  receive  this  currency  be  ascertained  ?  If 
it  were  issued  in  the  discount  of  bills,  how  could  the  sufficiency 
of  their  makers  be  determined  ?  By  evidence,  of  course,  —  by 
proof  of  their  solvency.  It  might  require  a  day  to  collect  and 
weigh  the  evidence  presented  in  any  one  case,  so  that  the 
commission  might  be  able  to  make  only  a  few  hundred  loans 
each  year ;  no  more  than  could  be  made  by  any  one  of  the 
twenty-two  hundi-ed  Banks  in  the  country.  How  would  such 
a  commission,  having  no  capital,  take  in  its  notes  when  pre- 
sented for  payment?  Large  losses  would  inevitably  be  in- 
curred. How  would  these  be  made  good?  If  any  doubt 
were  thrown  upon  the  ability  of  the  commission  to  redeem  its 
notes  when  presented,  no  one  would  receive  them,  or,  if  in  cir- 
culation, they  would  speedily  be  returned  for  payment  in  coin. 
The  moment  the  plan  of  a  single  office  of  issue  is  examined, 
its  absurdity  is  so  palpable  as  to  transcend  all  argument. 
Government  might  with  the  same  propriety  undertake  to 
supply  its  people  with  food  and  clothing  as  with  money. 
Money  is  the  equivalent  of  food  and  clothing. 

"In  another  part  of  this  work"  says  Ricardo,  "I  have  en- 
deavored to  show  that  the  real  vahie  of  a  commotlity  is  reguhited, 
not  by  the  accidental  advantages  which  may  be  enjoyed  by  some 
of  its  producers,  but  by  the  real  difficulties  encountered  by  that 
producer  who  is  least  favored.  It  is  so  with  respect  to  the  interest 
for  money :  it  is  not  regulated  by  the  rate  at  which  the  Bank  will 
lend,  whether  it  be  5,  4,  or  3  per  cent,  but  by  the  rate  of  profits 
which  can  be  made  by  the  employment  of  capital,  and  which  is 
totally  independent  of  the  quantity  or  of  the  value  of  money. 
Whether  a  Bank  lost  one  million,  ten  millions,  or  a  hundred  mill- 
ions, they  would  not  permanently  alter  the  market  rate  of  interest: 
they  would  alter  only  the  value  of  the  money  which  they  thus 
issued.  In  one  case,  ten  or  twenty  times  more  money  might  be 
required  to  carry  on  the  same  business  than  what  might  be  required 
in  the  other.  The  applications  to  the  Bank  for  money,  then,  depend 
on  the  comparison  between  the  rate  of  profits  that  may  be  made  by 
the  employment  of  it,  and  the  rate  at  which  they  are  willing  to 
lend  it.  If  they  charge  less  than  the  market  rate  of  interest,  there 
is  no  amount  of  money  which  they  might  not  lend.     If  they  charge 


DAVID    RICARDO.  229 

more  tlian  that  rate,  only  spendthrifts  and  prodigals  would  be  found 
to  borrow  of  them.  We  accordingly  find,  that,  when  the  market 
rate  of  interest  exceeds  the  rate  of  5  per  cent,  at  which  the  Bank 
uniformly  lends,  the  discount  office  is  besieged  with  applicants  for 
money ;  and,  on  the  contrary,  when  the  market  rate  is  even  tempo- 
rarily under  5  per  cent,  the  clerks  of  that  office  have  no  employ- 
ment. 

"  "  The  reason,  then,  why  for  the  last  twenty  years  the  Bank  is  said 
to  have  given  so  much  aid  to  commerce  by  assisting  the  merchants 
with  money,  is  because  they  have,  during  that  whole  period,  lent 
money  below  the  market  rate  of  interest ;  —  below  the  rate  at  which 
the  merchants  could  have  borrowed  elsewhere ;  but  I  confess,  that 
to  me  this  seems  rather  an  objection  to  their  establishment  than  an 
argument  in  favor  of  it. 

"  What  should  we  say  of  an  establishment  which  should  regularly 
supply  half  the  clothiers  with  their  wool  under  the  market  price  ? 
Of  what  benefit  would  it  be  to  the  community?  It  would  not 
extend  our  trade,  because  the  wool  would  equally  have  been 
bought  if  they  had  charged  the  market  price  for  it.  It  would 
not  loAver  the  price  of  cloth  to  the  consumer ;  because  the  price,  as 
I  have  said  before,  would  be  regulated  by  the  cost  of  its  production 
to  those  who  were  the  least  favored.  Its  sole  effect,  then,  would  be 
to  swell  the  profits  of  a  part  of  the  clothiers  beyond  the  general 
and  common  rate  of  profits.  The  establishment  would  be  deprived 
of  its  fair  profits,  and  another  part  of  the  community  would  be  in 
the  same  degree  benefited.  Now  this  is  precisely  the  effect  of  our 
banking  establishments.  A  rate  of  interest  is  fixed  by  the  law  below 
that  at  which  it  can  be  borrowed  in  the  market ;  and  at  this  rate  the 
Bank  is  required  to  lend,  or  not  to  lend  at  all.  From  the  nature  of 
their  establishment,  they  have  large  funds  which  they  can  only  deal 
with  in  this  way  ;  and  a  part  of  the  traders  of  the  CQuntry  are 
unfairly,  and  for  the  country  unprofitably,  benefited,  by  being 
enabled  to  supply  themselves  with  an  instrument  of  trade  at  a  less 
charge  than  those  who  must  be  influenced  only  by  market  price."  ^ 

It  was  upon  the  theory  that  the  least  favored,  not  the  most 
favored,  control  prices,  that  Ricardo  built  his  doctrine  of  rent, 
now  universally  accepted  by  the  Economists.  According  to 
this,  the  cost  at  which  a  farmer  can  afford  to  sell  a  bushel 
of  corn  produced  among  the  hills  of  New  Hampshire  regulates 
the  price  which  one  producing  it  upon  the  bottom  lands  of 
Illinois  can  obtain  for  it ;  or  the  cost  at  wliich  cloth  can  be 
produced  by  the  spinning-wheel  and  hand-loom  regulates  the 
price  which  can  he  obtained  for  that  produced  by  the  most 
approved  machinery.  The  difference  of  cost  of  production 
between  the  two  methods  is  profit  to  the  most  favored.  This 
assumption  was  preceded  by  another,  for  which  Ricardo  has  been 

1  Principles  of  Political  Economy  and  Taxation.     Chap.  xxv. 


230  HISTORY   OF   MONETARY  THEORIES. 

greatly  praised,  —  that  price  is  regulated  by  cost  alone.  The 
one  is  a  proper  sequence  of  the  other.  His  doctrine,  if  true, 
is  a  most  comforting  one  to  all  classes.  By  it  the  least  favored 
are  secured  from  loss,  wliile  the  most  favored  are  certain  of 
enormous  profits.  None  can  be  losers,  all  will  be  gainers, 
and  mankind  will  at  once  enter  upon  a  financial  millennium. 
Poverty  will  be  banished  from  the  earth.  Unfortunately,  the 
very  reverse  of  this  picture  is  too  often  the  rule.  The  most 
favored  often  find  themselves  in  the  greatest  straits  ;  and,  if 
they  can  sustain  themselves,  may  have  to  work  for  years  with- 
out any  profit  whatever.  What,  in  such  case,  becomes  of  the 
least  favored?  They  are,  as  it  were,  swept  out  of  existence. 
Ricardo's  assumption,  consequently,  is  exactly  opposed  to  the 
universal  experience  of  mankind.  The  Bank,  in  the  case 
supposed,  was  enabled  to  loan  below  the  market  rate  from 
being  the  most  favored  of  lenders.  It  was  intrusted  with  the 
custody  of  immense  sums,  upon  which  it  paid  no  interest. 
The  public  were  gainers  in  ratio  to  the  lowjiess  of  the  rates 
charged,  as  the  capital  loaned  became  the  basis  of  production 
or  distribution,  the  price  of  the  product  being  in  ratio  to  the 
price  of  capital.  That  the  Bank  favored  one  class  more  than 
another  was  unquestionably  a  pure  fiction.  The  rates  at 
which  it  loaned  depended,  as  they  will  always  depend,  upon 
the  goodness  of  the  security  offered.  Those  who  offered  the 
best  fared  the  best.  There  was  in  all  this  no  injustice,  but  the 
greatest  justice.  Reward  followed  desert.  If,  in  the  case 
supposed,  an  institution  supplied  one-half  the  clothiers  with 
wool  under  the  market  price,  what  would  be  lost  on  one  hand 
would  be  gained  on  the  other,  as  the  price  of  the  product 
would  be  in  ratio  to  the  cost  of  the  material.  The  illustration, 
however,  goes  for  nothing ;  for  there  never  was  and  never  will 
be  a  case  in  which  the  arbitrary  distinctions  he  supposed 
were  made. 

The  following  extract  will  show  the  manner  in  which 
Ricardo  proposed  to  establish  an  Economical  and  Secure 
Currency :  — 

"  A  well-regulated  paper  currency  is  so  great  an  improvement  in 
commerce,  that  I  should  greatly  regret  if  i)rejudice  should  induce 
us  to  return  to  a  system  of  less  utility.  The  introduction  of  the 
precious  metals  for  the  purposes  of  money  may,  with  truth,  be 


DAVID   KICAEDO.  231 

considered  as  one  of  the  most  important  steps  towards  the  improve- 
ment of  commerce  and  the  arts  of  civilized  life ;  but  it  is  no  less 
true,  that,  with  the  advancement  of  knowledge  and  science,  we 
discover  that  it  would  be  another  improvement  to  l)anish  them 
again  from  the  employment  to  which,  during  a  less  enlightened  age, 
they  had  been  so  advantageously  applied. 

"  If  the  Bank  should  be  again  called  upon  to  pay  their  notes  in 
specie,  the  effect  would  be  to  lessen  greatly  the  profits  of  the  Bank, 
without  a  corresponding  gain  to  any  other  part  of  the  commtmity. 
If  those  who  use  one  and  two,  and  even  five,  pound  notes  should 
have  their  option  of  using  guineas,  there  would  be  little  doubt 
which  they  would  prefer  ;  and  thus,  to  indulge  a  mere  caprice,  a 
most  expensive  medium  would  be  substituted  for  one  of  little 
value. 

"  Besides  the  loss  to  the  Bank,  which  must  be  considered  as  a 
loss  to  the  community,  general  wealth  being  made  up  of  individual 
riches,  the  State  would  be  subjected  to  the  useless  expense  of  coin- 
age ;  and,  on  every  fall  of  the  exchange,  guineas  would  be  melted 
and  exported. 

"  To  secure  the  public  against  any  other  variations  in  the  value 
of  the  currency  than  those  to  which  the  standard  itself  is  subject, 
and,  at  the  same  time,  to  carry  on  the  circulation  with  a  medium 
the  least  expensive,  is  to  attain  the  most  perfect  state  to  which  a 
currency  can  be  brought ;  and  we  should  possess  all  these  advan- 
tages by  subjecting  the  Bank  to  the  delivery  of  uncoined  gold  or 
silver  at  the  mint  standard  and  price,  in  exchange  for  their  notes, 
instead  of  the  delivery  of  guineas ;  by  which  means  paper  would 
never  fall  below  the  value  of  bullion  without  being  followed  by  a 
reduction  of  its  quantity.  To  prevent  the  rise  of  paper  above  the 
value  of  bullion,  the  Bank  should  be  also  obliged  to  give  their 
paper  in  exchange  for  standard  gold  at  the  price  of  £3  17s.  per 
ounce.  Not  to  give  too  much  trouble  to  the  Bank,  the  quantity  of 
gold  to  be  demanded  in  exchange  for  paper  at  the  mint  price  of 
£3  lis.  10^^.,  or  the  quantity  to  be  sold  at  the  Bank  at  £3  17s., 
should  never  be  less  than  twenty  ounces.  In  other  words,  the 
Bank  should  be  obliged  to  purchase  any  quantity  of  gold  that  was 
offered  them,  not  less  than  twenty  ounces,  at  £3  17s.  per  ounce, 
and  to  sell  any  quantity  that  might  be  demanded  at  £3  17s.  10c?. 
While  they  have  the  power  of  regulating  the  quantity  of  their 
paper,  there  is  no  possible  inconvenience  that  could  result  to  them 
from  such  a  regulation. 

"  The  most  perfect  liberty  should  be  given,  at  the  same  time,  to 
export  or  import  every  description  of  bullion.  These  transactions 
in  bullion  would  be  very  few  in  number,  if  the  Bank  regulated 
their  loans  and  issues  of  paper  by  the  criterion  which  I  have  so 
often  mentioned,  namely,  the  price  of  standard  bullion,  without 
attending  to  the  absolute  quantity  of  paper  in  circulation."  ^ 

Ricardo  would  maintain  the  value  of  paper  money  by  having 
it  represent  gold,  but  would  prevent  a  resort  to  gold  by  throw- 

1  Proposals  for  an  Economical  and  Secure  Currency,  Section  iv. 


232  HISTORY  OF  MONETARY  THEORIES. 

ing  inconveniences  in  the  way  of  its  use.  He  assumed,  of 
course,  that  only  a  small  amount  of  gold  would  be  required  to 
meet  occasional  calls  ;  for  nothing  would  be  gained,  provided  the 
amount  of  gold  to  be  held  in  reserve  equalled  the  amount  of 
notes  issued.  But,  if  it  were  optional  with  the  public  whether 
or  not  they  would  receive  the  notes  of  the  Bank,  they  would 
not  receive  them,  if  they  could  get  nothing  for  them  but 
bullion.  They  would  not  subject  themselves  to  the  expense, 
delay,  and  annoyance  of  having  the  bullion  that  might  be 
paid  them  coined.  Ricardo  proceeded  upon  the  assumption, 
that  what  the  public  wanted  was  currency,  —  a  medium  of  ex- 
change, —  not  capital.  If  perfect  freedom  were  allowed,  the 
people,  Ricardo  says,  from  mere  caprice,  would  indulge  in  a 
most  expensive  medium,  in  place  of  one  of  little  or  no  value. 
Such  caprice  must  not  be  submitted  to.  It  must  be  corrected 
by  the  inconvenience  of  indulging  it.  This  inconvenience 
must  exceed  the  convenience  of  the  use  of  coin  over  bullion. 
If  no  one  would  go  after  it,  the  Bank  or  mint  would  be  under 
no  necessity  to  maintain  on  hand  any  considerable  quantity, 
while  there  would  be  no  occasion  to  coin  even  such  quantity. 
In  this  way,  says  Ricardo,  a  perfect  currency  would  be  realized ; 
costing  nothing  in  itself,  yet  always  at  the  standard  of  coin ! 
He  would  invite  the  whole  world  to  a  Barmecide  feast, 
crowned  with  every  tiling  but  that  necessary  to  gratify  the 
appetite.  One  such  feast  would  be  enough  for  those  invited 
to  it ;  for,  it  is  to  be  feared,  that,  had  Ricardo  received  the 
treatment  properly  due  to  the  giver  of  such  an  entertainment, 
his  barren  nature  would  hardly  have  imitated  the  generous 
and  hospitable  spirit  of  the  inventor. 

Whoever  follows  the  Economists  must  make  up  his  mind  to 
be  surprised  b}^  no  folly  or  absurdity  which  he  may  meet: 
he  is  in  the  land  of  delusions  and  dreams.  The  moment  one 
crosses  the  line  between  the  world  of  affairs,  and  the  world  of 
theories  which  relate  to  money  and  subjects  kindred  to  it,  his 
whole  nature  seems  changed.  He  has  drunk  of  the  cup  of  Circe 
till  he  is  deprived  alike  of  sense  and  reason.  Ricardo  pos- 
sessed in  an  eminent  degree  the  gift  of  money-making,  and 
undoubtedly  ranked  high  as  a  man  of  affairs.  He,  however, 
no  sooner  took  up  his  pen  than  he  seemed  instantly  discharged 
of  all  reasoning  faculty.  In  the  same  sentence,  he  could  affirm 
propositions  exactly  opposed  the  one  to  the  other,  ^vithout  the 


ACT  OF   EESUIVIPTION.  233 

least  perception  of  their  incongriiity.  Never  was  there  a 
more  striking  instance  of  confident  assumption  on  the  one 
hand,  and  fatuity  on  the  other.  To  add  to  the  strangeness  of 
the  picture,  he  occupies  the  front  rank  among  the  Economists 
as  an  original  and  profound  thinker,  —  one  who  exploded 
many  of  the  radical  errors,  who  placed  on  firm  foundations 
some  of  the  most  important  truths  of  PoUtical  Economy,  and 
to  whom  it  is  more  indebted  than  to  any  writer  but  Adam 
Smith.  His  name  is  never  mentioned  but  with  expressions  of 
profound  respect.  From  his  example,  it  would  seem  that  no 
mind  is  capable  of  discussing  the  subject  of  money,  and  of  pre- 
serving, at  the  same  time,  its  balance  and  integrity.  The 
charm  or  influence  which  so  subverts  the  sense  of  mankind  is 
a  problem  in  psychology  well  worthy  the  most  careful  investi- 
gation. Its  solution  might  help  the  race  to  attack  and  over- 
throw delusions  upon  other  subjects,  equally  deep-rooted  and 
far  more  mischievous ;  for,  in  the  matter  of  money,  the  most 
groundless  and  absurd  theories  are  often  found  intimately 
associated  with  the  greatest  practical  talent  for  its  accumu- 
lation and  administration.  Life  nowhere  else  presents  an 
example  of  such  complete  disassociation  between  the  practical 
and  speculative  sides  of  our  nature. 

As  the  recommendations  contained  in  the  Report  of  the 
Bullion  Committee  were  rejected,  the  condition  of  the  Bank 
and  its  relations  to  the  government  and  the  public  remained 
unchanged.  The  price  of  gold,  however,  gradually  rose  ;  and, 
after  numerous  fluctuations,  reached  its  highest  point,  £5  10s. 
the  ounce,  in  August,  1813.  Upon  the  abdication  of  Napo- 
leon, in  1814,  it  fell  off  to  <£4  6s.  On  his  return  from  Elba, 
in  1815,  it  rose  to  £5  Is.  Upon  his  final  overthroAV,  its  price 
rapidly  declined  ;  and  in  October,  1816,  it  was  as  low  as 
.£3  18s.  6d.  the  ounce.  On  the  17th  of  April,  1817,  the 
Bank  gave  notice  of  its  readiness  to  pay  off  its  £1  and  £2 
notes  dated  prior  to  January  1, 1816 ;  and,  on  the  18th  of  Sep- 
tember of  the  same  year,  of  its  readiness  to  pay  off  all  its 
notes  dated  prior  to  January  1,  1817.  This  action  was  volun- 
tary on  the  part  of  the  Bank,  as  the  restriction,  which  was  to 
expire  at  the  end  of  six  months  after  a  definitive  treaty  of 
peace,  was  extended,  in  1815,  to  July  5, 1 816  ;  again  extended 
to  July  5,  1818  ;  and  again,  to  July  5,  1819.     On  the  28th  of 


234  HISTORY   OF   MONETARY   THEORIES. 

February,  181T,  the  Bank  had  in  its  vaults  £9,680,000  in  coin 
and  bullion;  on  the  31st  of  August,  of  the  same  year, 
X  11,688,000  ;  and  on  the  28th  of  February,  1818,  £10,055,000. 
Its  liabihties  on  its  notes  and  deposits,  on  the  28th  of  Feb- 
ruary, 1817,  .  equalled  £38,223,000.  It  was  at  that  time, 
apparently,  in  position  to  attempt  resumption.  But,  although 
peace  had  for  some  time  been  established,  order  had  by  no 
means  been  restored  in  commercial  circles ;  and  as  the  Bank 
possessed  no  available  capital  of  its  own,  except  its  accumulated 
profits,  amounting  only  to  a  few  millions,  it  had  really  no  con- 
trol over  the  coin  that  had  accumulated  in  its  vaults.  This 
was  speedily  drawn  out  in  the  adjustment  of  the  enormous 
debts  growing  out  of  the  recent  gigantic  struggle,  and  in  con- 
sequence of  the  commercial  embarrassments  and  disasters 
which  necessarily  accompanied  the  attempt  to  resume.  On  the 
27th  of  February,  1819,  the  coin  at  the  Bank  was  reduced  to 
£4,184,000 ;  and  as  it  was  seen  that  if  it  continued  to  pay 
its  means  woidd  speedily  become  exhausted.  Parliament 
early  in  1819,  again  interposed,  forbidding  any  further  cash 
payments.  At  the  same  time,  it  took  the  whole  subject  vigor- 
ously in  hand,  and  with  little  delay  passed  an  act,  of  which 
the  following  are  the  most  important  provisions  :  — 

"  1.  The  Restriction  Act  was  continued,  absolutely,  from  the  5th 
of  July,  1819,  to  February  1,  1820. 

"2.  Between  February  1  and  October  1,  1820,  the  Bank  was 
required  to  pay  its  notes  in  gold  bullion,  of  standard  fineness,  at 
the  rate  of  £4  Is.  per  ounce  ;  but  not  to  be  liable  to  a  demand  for  a 
less  quantity  than  sixty  ounces  at  one  time. 

"  3.  Between  October  1,  1820,  and  May  1,  1821,  the  Bank  was 
required  to  pay  its  notes  in  gold  bullion  upon  the  same  plan,  at 
the  rate  of  £3  19s.  6c?.  per  ounce. 

"4.  Between  May  1,  1821,  and  May  1,  1823,  the  Bank  was  to 
pay  in  gold  bullion  upon  the  same  plan,  at  the  rate  of  £3  17s.  lO^f?. 
per  ounce,  which  was  the  mint  price  of  gold. 

«  5.  From  May  1,  1823,  the  Bank  was  to  pay  its  notes  in  the 
gold  coin  of  the  realm, 

"6.  But  between  February  1  and  October  1,  1820,  the  Bank 
might  make  payments  at  a  less  rate  than  £4  Is.,  and  not  less 
than  £3  19s.  6d.  per  ounce  ;  and  between  October  1,  1820,  and 
May  1,  1821,  the  Bank  might  pay  at  any  rate  less  than  £3  19s.  Qd, 
and  not  less  than  £3  17s.  10|(?.,  on  giviiig  three  days'  notice  in  the 
Gazette.  Such  payments  to  be  made  in  ingots  or  bars  of  gold,  of 
the  weight  of  sixty  ounces.  The  Bank  was  also  permitted  to  pay 
in  gold  coin  on  or  after  May  1,  1822. 


/  THE   PANIC   OF   1826.  235 

"  7.  All  the  laws  which  restrained  the  exportation  of  gold  and 
silver  coin  were  repealed,  and  the  coin  was  allowed  to  be  exported 
or.  melted  without  incurring  any  penalty." 

It  will  thus  be  seen  that  the  law  providing  for  resumption 
was  based  upon  Ricardo's  proposition  for  a  Secure  and  Econom- 
ical Currency  ;  according  to  which,  if  called  upon,  the  Bank 
might  pay  in  bullion,  the  object  being  to  protect  it  from  de- 
mands for  small  sums.  The  Bank,  however,  did  not  avail 
itself  of  this  privilege  ;  while  it  anticipated  the  time  fixed  by 
Parliament,  by  resuming  pa3'ment  in  coin  on  the  first  of  May, 
1821. 

Simultaneously  with  the  passage  of  the  act  providing  for 
resumption,  was  that  of  another  forbidding  the  Bank  to  make 
loans  to  government  without  permission  of  Parliament.  The 
value  of  such  provision,  however,  was  wholly  negatived  by 
a  clause  allowing  the  Bank  to  continue  the  purchase  of 
Exchequer  bills. 

The  signal  failure  which  followed  the.  attempts  at  resump- 
tion, in  1817-18,  taught  the  Bank  a  lesson  which  was  well 
heeded  in  making  its  preparations  for  resumption  in  pursuance 
of  the  Act  of  1819.  No  sooner  was  that  Act  passed  than  it  im- 
mediately began  to  contract  its  issues,  and  continued  to  do  so 
till  the  close  of  1822.  On  the  31st  of  August,  1821,  its  note 
circulation  equalled  X20,29o,000  ;  its  deposits,  X5, 818, 000, 
and  its  specie,  ^11,233,000:  against  .£25,252,000  of  notes, 
£6,301,000  of  deposits,  and  £3,595,000  of  specie,  on  the 
31st  of  August,  1819;  and  against  £29,543,000  of  notes, 
£9,084,000  of  deposits,  and  £11,688,000  of  specie,  on  the 
31st  of  August,  1817.  The  reduction  of  liabilities  from  the 
time  the  Bank  attempted  to  resume  in  1817,  to  1821,  when  it 
did  resume,  equalled  £12,514,000.  The  circulation  was  still 
further  reduced  in  1822  ;  averaging,  for  that  year,  £18,165,000. 
Its  deposits  for  that  year  averaged  £5,544,000  ;  its  total  liabil- 
ities, only  £23,704,000,  — a  smaller  sum  than  for  any  year  since 
1802.  Its  average  liabilities  for  1814  equalled  £40,246,000  ; 
the  reduction  from  that  year  to  1822  equalling  £16,502,000. 
From  1822  to  1824,  the  Bank  did  not  materially  increase  its  note 
circulation;  that  for  the  former  year  averaging  £18,811,000, 
and,  for  the  latter,  £19,934,000.  Its  deposits,  growing  out  of  the 
operations  of  government,  however,  increased  from  £5,544,000, 
in   1822,  to  £9,888,000,  in  1824.     It  maintained  a  very  large 


236  HISTORY   OF   MONETARY   THEORIES. 

average  of  specie  imtil  1824 ;  holding,  on  the  31st  of  August 
of  that  year,  £11,787,000.  In  the  hitter  part  of  1824,  however, 
a  heavy  demand  set  in,  which  continued  uninterruptedly 
through  1825,  reducing  the  amount  in  the  Bank  on  the  28th 
of  December  of  that  year  to  £1,027,000,  against  £14,142,000 
lield  by  it  on  the  20th  of  December,  1823  ;  the  reduction  in  two 
years  equalling  £18,115,000.  The  year  1825  appeared  to  open 
most  auspiciously.  Even  the  King's  speech  dismissing  the 
Parliament  on  the  6th  of  July  of  that  year  congratulated  the 
country  upon  its  "  general  and  increasing  prosperity."  The 
more  sagacious,  however,  by  no  means  concurred  in  such  an 
opinion.  There  was  vast  activity,  based,  as  events  proved,  upon 
no  substantial  foundation.  Never  since  the  South  Sea  scheme 
had  there  ])een  a  spirit  of  speculation  so  excessive  and  universal 
as  that  which  prevailed  in  the  latter  part  of  1824  and  through- 
out 1825.  It  was  natural  that  the  people,  released  from  the 
apprehension  with  which  resumption  of  specie  payments  was  so 
long  viewed,  and  from  the  restraints  which  such  apprehension 
necessarily  imposed,  should  lose  control  of  themselves,  and 
rush  wildly  into  all  sorts  of  visionary  and  extravagant  schemes. 
This  could  not  have  been  possible  but  for  the  country  Banks, 
which  issued  their  notes  in  a  most  profuse  and  reckless  manner, 
fancying  that  they  were  possessed  of  the  same  impunity  as 
during  restriction.  The  conduct  of  the  Bank,  as  far  as  its 
issues  of  notes  were  concerned,  does  not  appear  to  have  been 
at  all  censurable.  The  average  amount  of  these  in  circulation 
in  1825  equalled  only  £20,^076,000,  against  £22.000.000  in 
1821,  the  year  of  the  resumption,  and  against  £18,065,000 
in  1822.  The  increase  was  certainly  no  greater  than  might 
have  been  expected  from  that  of  the  business  of  the  country  in 
the  thi'ee  years.  The  action  of  the  Bank,  however,  did  materi- 
ally assist  to  increase  the  inflation,  in  connection  with  that 
of  the  government,  which,  in  1824,  undertook  to  reduce 
£80,000,000  of  four  per  cents  to  three  and  one-half  per  cents. 
The  dissentients,  of  whom  there  were  a  large  number,  the 
Bank  undertook  to  pay  off.  This  threw  a  great  amount  of 
money  into  circulation.  It  also  induced  great  numbers  to  sell 
their  governments,  for  the  purpose  of  realizing  higher  rates  of 
interest.  The  public  mind,  therefore,  was  well  prepared  for 
the  reception  of  any  plausil)le  scheme  that  promised  great 
returns  upon  very  small  investments  ;  and  it  was  abundantly 
supplied.     In  less  than  two  years,  ending  with  1825,  six  hun- 


THE   PANIC   OF   1826.  237 

dred  and  twenty-four  speculative  companies  were  formed  and  put 
upon  the  market,  whose  share  capital  equalled  £  372,173, 000.^ 
At  the  same  time,  foreign  loans  were  negotiated  to  the  amount 
of  £52,994,000,  upon  a  considerable  portion  of  which  little  or 
notliing  was  ever  paid.^ 

1  These  companies  were  classified  as  follows :  — 

Capital. 

74  Mining  Companies £38,.370,000 

29  Gas  Companies 12,077,000 

20  Insurance  Companies 35,820,000 

29  Investment  Companies 62,600,000 

64  Canal  and  Railroad  Companies 44,051,000 

67  Steam  Companies 8,555,500 

11  Trading  Companies 10,450,000 

26  Building  Companies 13,781,000 

24  Provision  Companies 8,360,000 

292  Miscellaneous  Companies 148,108,600 

Total £372,173,100 

The  amount  actually  advanced  on  account  of  these  companies  equalled 
£17,605,625.  It  is  needless  to  say,  that  nearly  this  whole  sum  was  lost,  and,  with 
it,  a  vastly  larger  sum,  in  the  extravagance  and  folly  which  always  accompany 
an  intense  speculative  movement.  , 

2  The  following  is  a  list  of  foreign  loans  concluded  in  England  at  the  period 

under  discussion,  the  rate  per  cent,  and  the  rate  at  which  they  were  put  upon  the 

public  :  — 

Price  at  whicli 
Rate  of  Inter-  put  upon  the 
est  per  cent.  market  per 

cent. 

Austrian     » £2,500,000  6  82 

Brazilian 3,200,000  5  75 

2,000,000  5  86 

Buenos  Ayres 1,000,000  6  85 

Chilian 1,000,000  6  70 

Columbian 2,000,000  6  84 

4,750,000  6  88J 

Danish 5,500,000  3  "75 

Greek 800,000  6  59 

1,000,000  5  5&i 

Guatemala 1,428,571  6  73 

Gaudalajara 600,000  5  60 

Mexican 8,200,000  5  58 

3,200,000  6  891 

Neapolitan 2,500,000  5  92^ 

Prussian 5,000,000  6  72 

3,500,000  6  84 

Portuguese 1,600,000  5  87 

Peruvian 4-50,000  6  88 

750,000  6  82      ~ 

616,000  6  78 

Russian 3,500,000  5  82 

Spanish 1,600,000  5  56 

„           1,600,000  5  80i 

Total    ....      £52,994,571 


238  HISTOKY  OF   MONETAEY  THEORIES. 

But  speculation  was  by  no  means  confined  to  fictitious  or 
fraudulent  enterprises  and  companies,  nor  to  worthless  foreign 
loans.  It  invaded  every  walk  of  life  and  every  department 
of  industry  and  trade.  In  the  general  delirium,  the  relation  be- 
tween values  and  price  was  wholly  lost  sight  of.  For  a  brief 
period,  the  people  rioted  in  their  imagined  wealth  ;  coming  to 
consciousness  only  when  their  actual  means  were  well-nigh 
dissipated,  to  see  no  trace  of  their  magnificent  bubbles  but  the 
ruins  left  behind. 

The  Bank,  for  a  considerable  time  after  the  drain  set  in, 
endeavored  to  protect  itself  by  refusing  to  make  loans.  Such 
refusal  only  added  to  the  alarm  which  prevailed,  and  to  the 
run  upon  it.  Seeing  nothing  but  certain  destruction  in  such 
a  course,  the  Bank  suddenly  changed  its  policy,  and  determined, 
as  far  as  its  means  would  go,  to  meet  all  calls  that  could 
properly  be  made  upon  it.  The  mint  was  driven  to  its  utmost 
capacity  ;  turning  out  daily  150,000  guineas.  Notes  could  not 
be  so  readily  provided.  The  Bank  luckily,  however,  found  a 
large  package  of  XI  and  £2  notes  Avhich  had  been  taken  in, 
but  by  some  accident  had  not  been  cancelled.  Before  these 
were  wholly  paid  out,  the  panic  subsided.  "  During  its  contin- 
uance," said  Mr.  Harmon,  Governor  of  the  Bank  at  the  time, 
in  his  evidence  before  a  Committee  of  the  House  of  Commons, 
"  we  lent  by  every  possible  means,  and  in  modes  that  we  never 
had  adopted  before.  We  took  in  stock  as  security  ;  we  pur- 
chased Exchequer  bills  ;  we  made  advances  on  Exchequer  bills  ; 
we  not  only  discounted  outright,  but  we  made  advances  on 
deposits  of  bills  of  exchange  to  an  immense  amount, — in  short, 
by  every  possil)le  means  consistent  with  the  safety  of  the 
Bank  ;  and  we  were  not,  upon  some  occasions,  over-nice.  See- 
ing the  dreadful  state  in  which  the  public  were,  we  rendered 
every  assistance  in  our  power.  ...  As  far  as  my  judgment 
goes,  the  discovery  of  the  package  of  X 1  notes  saved  the  credit 
of  the  country." 

The  events  of  1826  were  well  calculated  to  arrest  the  at- 
tention of  government.  No  sooner  had  the  panic  subsided 
than  Lord  Liverpool  addressed  a  communication  to  the  Bank, 
remarkable  for  being  one  of  the  few  papers  in  the  literature 
of  finance  in  which  there  is  any  recognition  of  the  principles 
upon  which  a  symbolic  currency  must  rest. 


THE   ACT   OF   1826  —  JOINT-STOCK   BANKS.  239 

"  However  much,"  said  Lord  Liverpool,  "  the  recent  distress  may 
have  been  aggravated,  in  the  judgment  of  some,  by  incidental 
circumstances  and  particular  measures,  there  can  be  no  doubt  that 
the  principal  source  of  it  is  to  be  found  in  the  rash  spirit  of  specu- 
lation, which  has  pervaded  the  country  for  some  time,  supported, 
fostered,  and  encouraged  by  the  country  Banks. 

"  The  remedy,  therefore,  for  this  evil  in  future  must  be  found 
in  an  improvement  in  the  circulation  of  the  country  paper ; 
and  the  first  measure  which  has  suggested  itself  to  most  of  those 
who  have  considered  the  subject,  is  a  recmTcnce  to  gold  circula- 
tion throughout  the  country,  as  well  as  in  the  metropolis  and  its 
neighborhood,  by  a  repeal  of  the  Act  which  permits  country  Banks 
to  issue  £1  and  £2  notes,  until  the  year  1833  ;  and  by  the  im- 
mediate enactment  of  a  prohibition  of  any  such  issues  at  the 
expiration  of  two  or  three  years  from  the  present  period.  .  .  ^. 

"  But  though  a  recurrence  to  gold  circulation  in  the  country,  for 
the  reasons  already  stated,  might  be  productive  of  some  good,  it 
could  by  no  means  go  to  the  root  of  the  evil. 

"  We  have  abundant  proof  of  the  truth  of  this  position  in  the 
events  which  took  place  in  the  spring  of  1793,  when  a  convulsion 
occurred  in  the  money  transactions  and  circulation  of  the  country 
more  extensive  than  that  which  we  have  recently  experienced.  At 
that  period,  nearly  a  hundred  country  Banks  were  obliged  to  stop 
payment,  and  Parliament  was  induced  to  gi*ant  an  issue  of  Ex- 
chequer bills  to  relieve  the  distress  ;  yet  in  the  year  1793  there 
were  no  £1  or  £2  notes  in  circulation  in  England,  either  by  country 
Banks  or  by  the  Bank  of  England. 

"  We  have  a  further  proof  of  the  truth  of  what  has  been  ad- 
vanced, in  the  experience  of  Scotland,  which  has  escaped  all  the 
convulsions  which  have  occurred  in  the  money  market  of  England 
for  the  last  thirty-five  years ;  though  Scotland,  during  the  whole  of 
that  time,  has  had  a  circulation  of  £1  notes,  and  the  small  pecuni- 
ary transactions  of  that  part  of  the  United  Kingdom  have  been 
carried  on  exclusively  by  means  of  such  notes. 

"  The  issue  of  small  notes,  though  it  be  an  aggravation,  cannot, 
therefore,  be  the  sole,  or  even  the  main,  cause  of  the  evil  in 
England. 

"  We  have,  to  a  considerable  degree,  the  proof  of  this  position 
in  the  very  establishment  of  so  many  country  Banks. 

"  Within  the  memory  of  many  living,  and  even  of  some  of  those 
now  engaged  in  public  affairs,  there  were  no  country  Banks  except 
in  a  few  of  the  great  commercial  towns. 

"  The  money  transactions  of  the  country  were  carried  on  by 
supplies  of  coin  and  bank-notes  from  London. 

"The  extent  of  the  business  of  the  country,  and  the  improve- 
ments made  from  time  to  time  in  the  mode  of  conducting  our  in- 
creased commercial  transactions,  founded  on  pecuniary  credit, 
rendered  such  a  system  no  longer  adequate  ;  and  country  Banks 
must  have  arisen  —  as,  in  fact,  they  did  arise — from  the  increased 
wealth  and  new  wants  of  the  country. 

"  The  matter  of  regret  is,  not  that  country  Banks  have   been 


240  HISTORY   OF   MONETARY  THEORIES. 

suffered  to  exist,  but  that  they  have  been  suffered  to  exist  so  long 
without  control  or  limitation,  or  without  the  adoption  of  provisions 
calculated  to  counteract  the  evils  resulting  from  their  improvidence 
or  excess. 

"  It  would  be  vain  to  suppose  that  we  could  now,  by  any  act  of 
the  Legislature  extinguish  the  existing  country  Banks,  even  if  it 
were  desirable:  but  it  may  be  within  our  power,  gradually  at 
least,  to  establish  a  sound  system  of  banking  throughout  the 
country ;  and,  if  such  a  system'could  be  formed,  there  can  be  little 
doubt  that  it  would  ultimately  extinguish  and  absorb  all  that  is 
objectionable  and  dangerous  in  the  present  banking  establishments. 
"  There  appear  to  be  two  modes  of  attaining  this  object :  — 
"  1st.  That  the  Bank  of  England  should  establish  branches  of 
its  own  body  in  different  parts  of  the  country. 

"  2dly.  That  the  Bank  of  England  should  give  up  its  exclusive 
privileges  as  to  the  number  of  partners  engaged  in  banking  except 
within  a  certain  distance  of  the  metropolis. 

"  It  has  always  appeared  to  me,  that  it  would  have  been  very 
desirable  that  the  Bank  should  have  tried  the  first  of  tliese  plans,  — 
that  of  eslablishino;  branch  Banks  upon  a  limited  scale. 

"  But  I  am  not  insensible  to  the  difficulties  ^yhich  would  have 
attended  such  an  experiment ;  and  I  am  quite  satisfied  that  it  would 
be  impossible  for  the  Bank,  under  present  circumstances,  to  carry 
into  execution  such  a  system  to  the  extent  necessary  for  providing 
for  the  wants  of  the  country. 

"  There  remains,  therefore,  only  the  other  plan,  —  the  surrender 
by  the  Bank  of  their  exclusive  privileges  as  to  the  number  of 
partners  within  a  certain  distance  form  the  metropolis. 

"  The  effect  of  such  a  measure  would  be  the  gradual  establish- 
ment of  extensive  and  respectable  Banks  in  different  parts  of  the 
country ;  some,  perhaps,  with  charters  from  the  Crown,  and  some 
without. 

"  Here  we  have  again  the  advantage  of  the  experience  of  Scot- 
land. 

"  In  England,  there  are  said  to  be  between  eight  and  nine  hun- 
dred country  Banks  ;  and  it  is  no  exaggei-ation  to  suppose  that  a 
great  proportion  of  them  have  not  been  conducted  with  a  due  at- 
tention to  those  precautions  which  are  necessary  for  the  safety  of 
all  banking  establishments,  even  where  their  property  is  more  ample. 
When  such  Banks  stop,  their  creditors  may  ultimately  be  paid  the 
whole  of  their  demands ;  but  the  delay  and  shock  to  credit  may,  in 
the  mean  time,  involve  them  in  the  same  difficulty,  and  is  always 
attended  with  the  greatest  injury  and  suffering  in  the  districts  where 
such  stoppages  occur.  If  this  be  the  case  where  the  solidity  of  the 
Bank  is  unquestionable,  what  must  it  be,  as  too  often  happens,  when 
they  rest  on  no  solid  foundation  ? 

"  In  Scotland  there  are  not  more  than  thirty  Banks,  and  these 
Banks  have  stood  firm  amidst  all  the  convulsions  in  the  money 
market  in  England,  and  amidst  all  the  distresses  to  which  the  man- 
ufacturing and  agricultural  interests  in  Scotland,  as  well  as  in 
England,  have  occasionally  been  subject. 


THE  ACT   OF   1826  —  JOINT-STOCK   BANKS.  241 

"  Banks  of  this  description  must  necessarily  be  conflucted  upon 
the  general,  understood,  and  approved  principles  of  banking. 

"Individuals  are,  from  the  nature  of  the  institutions,  precluded 
from  speculating  in  the  manner  in  which  persons  engaged  in  coun- 
try, and  even  in  London  Banks  speculate  in  England. 

"  The  failures  vi'hich  have  occurred  in  England,  unaccompanied 
as  they  have  been  by  the  same  occurrences  in  Scotland,  tend  to 
prove  that  there  must  have  been  an  unsolid  and  delusive  system  of 
banking  in  one  part  of  Great  Britain,  and  a  solid  and  substantial 
one  in  the  other. 

"  It  would  be  entirely  at  variance  with  my  deliberate  opinion, 
not  to  do  full  justice  to  the  Bank  of  England  as  the  great  centre  of 
circulation  and  commercial  credit. 

"  I  believe  that  much  of  the  prosperity  of  the  country  for  the 
last  century  is  to  be  ascribed  to  the  general  wisdom,  justice,  and 
fairness  of  all  its  dealings ;  and  I  further  think,  that,  during  a 
great  part  of  that  time,  it  may  have  been  in  itself  and  by  itself  fully 
equal  to  all  the  important  duties  and  operations  confided  to  it :  but 
the  progress  of  the  country  during  the  last  thirty  or  forty  years  in 
every  branch  of  industry  —  in  agriculture,  manufactures,  commerce, 
and  navigation  —  has  been  so  rapid  and  extensive  as  to  make  it  no 
reflection  upon  the  Bank  of  England  to  say  that  the  instrument, 
which  by  itself  was  fully  adequate  to  former  transactions,  is  no 
longer  sufficient,  without  new  aids,  to  meet  the  demands  of  the 
present  times. 

"  If  the  concerns  of  the  country  could  be  carried  on  without  any 
other  Bank  than  the  Bank  of  England,  there  might  be  some  reason 
for  not  interfering  with  their  exclusive  privileges  ;  but  the  efiect  of 
the  law  at  present  is  to  permit  every  description  of  banking  ex- 
cept that  which  is  solid  and  secure."  ^ 

The  Bank,  conscious  of  its  impotence,  contented  itself 
with  a  feeble  protest.  An  Act  was  presently  passed  allowing 
the  formation  of  banking  companies  to  be  composed  of  any 
number  of  partners  or  members.  It  also  authorized  the  Bank 
to  establish  branches  in  various  parts  of  England.  Its  object 
was  to  increase  the  value  and  stability  of  the  country  circula- 
tion. '  It  had  been  claimed,  some  time  previous  to  its  passage, 
that  joint-stock  Banks  consisting  of  more  than  six  persons 
might  be  organized  under  existing  laws,  although  not  possess- 
ing the  power  of  issuing  notes.  The  right  to  form  them  was 
now  declared  to  exist  in  all  parts  of  England,  with  right  to 
issue  notes  except  within  sixty-five  miles  of  London.  If 
Banks,  other  than  the  Bank  of  England,  were  allowed  this  privi- 
lege, there  was  every  reason,  argued  Lord  Liverpool,  why  they 
should  be  so  organized  as  to  give  the  highest  value  to  their 

1  Correspondence  between  the  Government  and  the  Bank  of  England,  1826. 

16 


242  HISTORY   OF   MONETARY   THEORIES. 

issues.  Altliougli  the  continued  issue  of  =£1  and  <£2  notes 
was  revoked,  Lord  Liverpool  by  no  means  referred  the  panic 
chiefly  to  their  use.  The  Scotch  Banks,  he  said,  issued  £1 
and  £  2  notes ;  indeed,  exchanges  in  that  part  of  the  country 
were  largely  effected  by  the  use  of  such  ;  yet  during  the  panic 
of  1826  not  a  single  Scotch  Bank  failed,  nor  were  the  business 
operations  of  that  country  materially  affected  by  the  panic  of 
that  year.  Scotland  almost  wholly  escaped  the  disasters  that 
befell  England.  The  Scotch  system  was  shown,  in  its  results 
at  least,  to  be  an  admirable  one.  It  seems  incredible,  consider- 
ing the  magnitude  and  importance  of  the  subject,  and  in  ^dew 
of  the  terrible  losses  on  one,  and  the  uniform  prosperity  on 
the  other  side  of  an  imaginary  boundary  between  sections 
composing  a  political,  geographical,  and  commercial  unit,  only 
with  different  monetary  systems,  that  neither  Parliament  nor 
its  Committees,  writers  upon  the  subject  of  money,  —  nor,  in 
fact,  the  English  people,  —  should  have  taken  the  least  pains  to 
trace  out  the  cause  of  the  wonderful  difference  between  the 
two.  An  examination  of  the  Scotch  system,  in  a  proper 
spirit,  would  have  readity  solved  all  the  laws  on  which  a  sym- 
bolic currency  rests.  It  was  certainly  the  duty  of  those  who 
assumed  to  unfold  the  principles  of  money,  to  give  the  reasons 
of  the  widely  different  phenomena  presented  by  the  two  sys- 
tems. Instead  of  doing  this,  they  shrugged  their  shoulders 
when  the  Scotch  system  was  referred  to,  with  an  —  "  Ah  !  Scot- 
land is  a  very  different  country  from  England  ;  "  while  one  of 
the  most  distinguished  among  the  Economists,  in  reply  to  an 
assertion  of  the  excellence  of  the  Scotch  system,  replied : 
"  Yes  ;  but  a  lion's  tail  is  a  very  different  affair  from  his 
maw." 

The  Bank,  upon  its  recovery  from  the  effects  of  the  panic  of 
1826,  held  a  pretty  even  course  till  1832,  when  it  was  sub- 
jected to  a  heavy  drain  of  specie,  to  check  which  no  extraor- 
dinary means  were  resorted  to.  In  that  year,  as  was  the  wont 
of  the  House  of  Commons  upon  similar  occasions,  a  Com- 
mittee were  appointed  to  consider  the  subject  of  the  extension 
of  the  charter  of  the  Bank,  which  was  to  expire  in  1834.  It 
took  an  enormous  amount  of  evidence ;  the  number  of  ques- 
tions put  to  the  persons  examined  being  nearly  six  thou- 
sand. The  substance  of  its  report  is  embraced  in  the  following 
paragraph :  — 


REPORT   OF  THE  HOUSE   CO^EMITTEE  OF   1832.  243 

"  The  principal  points  to  which  the  Committee  directed  their 
attention  were  :  — 

"  1st.  Whether  the  paper  circulation  of  the  metropolis  should  be 
confined,  as  at  present,  to  the  issues  of  one  Bank,  and  that  a  com- 
mercial company  ;  or,  wliether  a  competition  of  different  Banks  of 
issue,  each  consisting  of  an  unlimited  number  of  partners,  should 
be  permitted. 

"  2dly.  If  it  should  be  deemed  expedient  that  the  paper  circu- 
lation of  the  metropolis  should  be  confined,  as  at  present,  to  the 
issues  of  one  Bank,  how  far  the  whole  of  the  exclusive  privileges 
possessed  by  the  Bank  of  England  are  neceessary  to  effect  this 
object. 

"  3dly.  What  checks  can  be  provided  to  secure  for  the  public 
a  proper  management  of  Banks  of  issue  ;  and,  especially,  whether  it 
would  be  expedient  and  safe  to  compel  them  periodically  to  publish 
their  accounts  ? 

"  With  respect  to  the  circulation  of  paper  in  the  country,  the 

Committee  have  examined,  first,  into  the  effect  produced  by  the 

establishment    of  branch  Banks  of  the  Bank   of    England ;    and, 

secondly,  into  the  expediency  of  encouraging  the  establishment  of 

.joint-stock  Banks  of  issue  in  the  country. 

"  On  all  these,  and  on  some  collateral  points,  more  or  less  informa- 
tion will  be  found  in  the  '  Minutes  of  Evidence  ;'  but  on  no  one 
of  them  is  it  so  complete  as  to  justify  the  Committee  in  giving  a 
decided  opinion."  ^ 

The  Committee  showed  wisdom  in  their  Report.  An  at- 
tempt to  draw  a  conclusion  from  the  evidence  would  be  to 
draw  order  out  of  chaos  ;  or  to  establish  propositions  from 
statements  which,  taken  in  the  mass,  disproved  every  thing 
sought  to  be  proved.  The  whole  affair  resembled  a  melee  in 
which  all  the  combatants  are  concealed  from  view  by  the 
clouds  of  dust  they  raise.  The  evidence  given  was  a  re- 
statement of  the  dogmas  of  Adam  Smith,  furbished  up  and 
amplified  by  the  Economists  of  the  later  school.  It  is  impor- 
tant only  from  its  bearing  upon  future  legislation,  and  par- 
ticularly as  leading  the  way  to  the  Act  of  1844.  That  of  the 
more  important  witnesses  is  sufficiently  shown  in  the  follow- 
ing extracts,  copied  from  the  "  Digest  of  the  Evidence  on  the 
Bank  Charter  taken  before  the  Committee  of  1832." 

Mr.  Jones  Loyd  (now  Lord  Overstone)  :  — 

"  The  establishment  of  joint-stock  Banks  in  London,  liy  in- 
creasing the  demand  for  bullion,  it  is  to  be  presumed  would  have 

1  Report  of  the  Committee  of  the  House  of  Commons  upon  the  Bank  of  Eng- 
land Charter,  1832. 


244  HISTORY  OF  MONETARY  THEORIES. 

the  effect  of  raising  the  market  price  of  gold.  A  greater  amount 
of  gold  would  be  required  to  manage  the  same  amount  of  paper 
circulations,  upon  the  system  of  multiplied  issues,  than  at  present ; 
but  any  advantage  produced  by  the  existence  of  a  greater  quantity 
of  gold  would  be  at  the  sacrifice  of  the  benefit  intended  to  be  pro- 
duced by  the  paper  currency,  viz ;  the  transference  of  capital 
from  the  unproductive  state  of  bullion  to  a  productive  state. 
Joint-stock  Banks  are  deficient  in  every  requisite  except  extended 
responsibility.  Acting  through  agents,  and  not  by  principals,  they 
cannot  decide  upon  special  cases  with  so  nice  a  reference  to  cir- 
cumstances as  the  private  banker  ;  nor  can  they  exercise  that 
promptitude  and  hourly  watchfulness,  nor  preserve  that  secrecy, 
which  is  so  essential  in  banking  operations."  —  Digest,  pp.  62,  63. 

Mr.  Ward,  one  of  the  Directors  of  the  Bank  :  — 

"  The  immediate  profit  of  the  Bank  requires  the  smallest  possible 
amount  of  treasure,  and  the  public  interest  likewise  requires  it ; 
for  otherwise  the  currency  would  be  too  much  depressed.  .  .  . 
The  Bank,  in  1822,  viohited  its  principles  by  keeping  an  excess  of 
gold  ;  but  the  altered  law  compelled  it.  It  is  the  prerogative  of 
the  crown  to  decide  what  the  gold  currency  shall  be,  and  the  Bank 
does  its  duty  by  making  its  paper  issues  represent  the  gold  coin  as 
nearly  as  possible."— Digest,  pp  26-28. 

Mr.  Norman,  one  of  the  Directors  of  the  Bank  :  — 

"  There  can  be  no  depreciation  (from  over-issue),  unless  every 
article  rises  in  price.  .  .  .  Paper  money  is  depreciated  by  ex- 
cess, just  as  metallic  coin  is  depreciated  by  a  deduction  from  its 
weight.  .  .  .  Notes  should  not  be  issued  without  securities.  If 
the  customers  of  any  Bank  are  satisfied  with  its  solidity,  the 
public  at  large  has  very  little  more  to  do  with  it.  The  objection  is 
in  toto  to  the  establishment  of  joint-stock  company  Banks  in  Lon- 
don, or  increased  competition  among  the  issuers  of  paper  money. 
.  .  .  Exchequer  bills,  mortgages,  and  even  bonds,  might  be  taken 
to  a  certain  amount.  .  .  .  Landed  security  might  be  taken,  and  the 
responsibility  should  be  limited  or  unlimited,  as  that  of  other  mer- 
cantile concerns  might.  The  Bank  of  England,  for  instance,  has 
its  capital  lent  to  government,  —  the  dead  weight  and  Exchequer 
bills.  All  these  might  be  made  securities  for  its  issues.  The  Legis- 
lature ought  to  guard,  as  far  as  possible,  against  the  insolvency  of 
Banks  of  issue :  their  deposits  are  voluntary  transactions  on  the 
part  of  the  public.  Perhaps,  compelling  country  bankers  to  give 
security  might  induce  them  to  issue  Bank  of  England  notes  in- 
stead of  their  own.  Ninety-nine  monopolies  out  of  one  hundred 
are  mischievous ;  but  the  monopoly  of  the  Bank  of  England  is  an 
exception.  The  supply  of  paper  money  is  precisely  the  case  in 
which  monopoly  is  not  a  disadvantage.  The  government  miglit 
determine  to  issue  £20,000,000  of  paper,  payable  in  gold,  or 
secured  on  bullion  to  the  amount,  and  then  the  banking  trade  of 


EVIDENCE   TAKEN   BY   THE   COMMITTEE   OF   1832.  245 

London  might  be  thrown  open  ;  but,  even  then,  in  times  of  diffi- 
culty, some  advantage  is  derived  from  one  great  establishment  of 
undoubted  solidity  and  untarnished  credit.  Issues  of  gold  are  un- 
avoidable :  the  Bank  has  no  control.  Issues  of  government 
securities  are  not  so  absolutely  necessary  :  but  this  concerns  the 
Bank,  not  the  public ;  for  the  note  issued  is  money,  and  the 
Bank  must  provide  for  the  demand  on  it.  In  1825,  the  issues 
might  have  been  made  a  hundred  times  over  without  producing 
excitement."— Digest,  39,  42,  43. 

Mr.  Tooke :  — 

"There  exists  no  more  reason  for  two  or  more  Banks  than  for 
two  or  more  mints.  ...  If  the  cash  of  the  Bank  of  England  were 
completely  drained,  and  the  government  issued  paper  on  their  own 
responsibility,  the  confidence  of  persons  would  be  increased.  All 
paper  money  should  be  issued  by  the  government,  on  the  same 
ground  that  coin  is.  .  .  .  The  issuing  of  paper  notes  by  bankers  is 
a  source  of  profit,  which  coin  is  not.  The  State,  therefore,  is  en- 
titled to  a  very  lai-ge  jjortiou  of  the  profits  arising  from  the  circu- 
lation. .  .  ,  The  establishment  of  joint-stock  companies  w'ould  be 
in  opposition  to  the  princij^le  of  having  one  Bank  of  issue  for  the 
whole  country.  .  .  .  The  amount  of  issues  of  the  Bank  of  Eng- 
land does  not  influence  prices,  without  a  consideration  of  the 
circumstances  at  the  time.  .  .  .  Neither  paper  nor  credit  is  capital, 
but  investments.  All  paper  (such  as  the  Bank  of  England's 
£20,000,000),  that  bears  interest  may  be  called  investments  in  pro- 
ductive securities.  The  issue  of  paper  money  through  discount 
(of  bills)  or  accommodation  is  objectionable,  for  the  demand  in  that 
way  prevails  most  generally  at  the  time  when  it  is  most  essential 
to  contract  the  circulation.  Therefore,  there  is  often  an  excess  of 
issue  through  the  medium  of  private  credit,  w^hich  would  not 
occur  if  paper  -were  substituted  for  gold.  .  .  .  An  increase  of  paper 
is  most  commonly  the  consequence  of  a  tendency,  from  other 
causes,  to  a  rise  of  prices.  In  every  original  instance,  the  rise  or 
fall  of  prices  has  preceded,  and  therefore  could  not  be  the  effect 
of  an  enlargement  and  contraction  of  the  Bank  circulation.  .  .  . 
There  cannot  be  an  excessive  issue  of  convertible  paper  as  relates 
to  the  Bank  itself;  but  there  may  be  as  regards  the  public." — Digest, 
p.  78,  80,  81,  90. 

Mr.  Grote :  — 

"  I  would  have  the  Bank  of  England  compelled  to  pay  over  all 
the  profits  of  their  circulation  to  the  public,  saving  so  much  as  might 
be  a  fair  remuneration  for  the  trouble  and  risk  of  administering  the 
details  of  it.  This  should  be  accounted  for  directly  to  government, 
and  not  be  made  a  set-off  in  any  bargain  made  as  to  the  management 
of  the  national  debt.  In  point  of  principle,  the  country  bankers 
might  also  be  called  upon  to  give  up  their  profits  on  the  circula- 
tion ;  but,  seeing  that  the  number  of  parties  everywhere  out  of  the 


246  HISTOEY   OF   MONETARY   THEORIES. 

metropolis  had  acquired  a  certain  established  interest  in  the  circu- 
lation, it  would  be  throAving  them  out  of  their  business  to  deal 
similarly  with  them.  Had  they  all  charters  expiring,  like  the 
Bank,  they  might  be  ruled  afresh.  It  is  in  consideration  of  the 
circulation  of  London  being  capable  of  yielding  a  profit,  and  of 
that  circulation  being  at  the  disposal  of  Parliament,  witness  holds 
that  terms  may  be  exacted  from  the  body  to  be  endowed  with  its 
administration. 

"  More  than  one  joint-stock  Bank  of  issue  in  the  metropolis 
would  be  mischievous.  If  you  have  only  one  such  Bank,  you  get  a 
circulation,  considered  as  a  whole,  which  would  be  impossible  were 
it  distributed  among  six  or  eight  or  ten  Banks.  No  one  among 
these  competing  B.-rnks  would  be  either  able  or  willing  to  measure 
its  separate  issues  in  reference  to  the  total  amount  of  circulating 
medium  required.  Each  might  unseasonably  maintain  or  extend  its 
issues  ;  taking  the  chance  of  being  able  to  supplant  the  notes  of 
other  Banks.  In  the  provinces,  evils  of  the  same  nature  would 
arise.  Many  stock  Banks  in  a  district  would  present  less  security 
against  over-issue  than  a  single  Bank.  Under  a  single  Bank,  that 
contraction  of  the  currency  which  is  incident  to  a  fall  in  prices 
would  be  earlier  foreseen,  and  more  gradually  brought  about,  than 
by  a  number  of  competing  Banks ;  because  their  rivalry  would  in- 
duce each  to  delay  tlie  numient  of  beginning  the  contraction  until 
its  necessity  became  both  urgent  and  notorious.  Then  the  thing 
havino-  been  too  lonsj  deferred,  would  be  carried  into  effect  with 
rigorous  violence. 

"  Witness  does  not  see  that  a  metallic  currency  would  give  any 
protection  against  fluctuations  in  the  price  of  commodities,  in 
the  rate  of  exchanges,  and  in  the  rates  of  commercial  discounts. 
These  would  partly  depend  on  the  state  of  the  harvest,  and  the  cir- 
cumstances of  dividends  being  paid  in  at  fixed  periods.  Fluc- 
tuations would  occur  in  a  currency  referrible  to  any  definite  standard 
whatever  ;  and,  doubtless,  our  present  standard  is  less  liable  than 
any  other  to  variations."  — Digest,  pp.  97-99. 

Mr.  Glyn :  — 

"  The  exclusive  privileges  of  the  Bank  of  England  are  decidedly 
advantageous  to  the  London  bankers,  because  the  existence  of 
more  than  one  Bank  of  issue  would  expose  the  commercial  world  to 
fluctuations,  and  cause  such  bankers,  in  particular,  great  inconven- 
ience in  the  details  of  their  business.  It  would  compel  them  to 
keep,  probably,  three  or  four  times  the  amount  of  gold  in  hand 
now  necessary.  The  establishment  of  competition  among  the 
Banks  of  issue  would  affect  the  circulating  medium,  exposing  it  to 
certain  increase  and  reduction.  The  natural  inclination  of  all  bank- 
ing companies  seeking  profit  for  their,  proprietors  must  be  to  extend 
their  issues.  The  sense  of  danger  attending  over-issues  would  be 
a  very  doubtful  check ;  for,  under  competition,  though  a  return  of 
paper  might  be  apprehended,  every  company  wouLJ  speculate  on 
its  coming  back  more  upon»its  competitors  than  upon  itself.     The 


COiBIENTS   UPON   THE   EVIDENCE,  1832.  247 

scramble  for  profits  would  prevent  that  due  regulation  of  issues 
essential  to  a  safe  circulation.  Joint-stock  Banks  have  been  es- 
tablished in  the  country ;  but  are  not,  in  general  opinion,  fitted  for 
London  and  its  trade.  The  competition  of  four  or  five  joint-stock 
Banks  in  London  would  compel  private  houses  to  answer  drafts  in 
their  own  notes,  if  demanded.  To  keep  cash  by  them  to  make  pay- 
ments in  gold,  whenever  the  paper  of  another  company  was 
demanded,  would  be  exceedingly  inconvenient."  —  Digest,  p.  54. 

Mr.  Gurney  :  — 

"  A  mixed  circulation  is  the  best  state  of  currency.  Such  a  cir- 
culating medium  as  we  now  have  has  the  most  wholesome  effect  in 
controlling  these  variations  (in  prices).  It  is  not  assumed,  in  the 
nature  of  a  paper  circulation,  that  with  rising  prices  there  would  be 
enlarged  issues,  and  with  falling  prices,  a  contraction  ;  having  a 
tendency  in  each  case  to  increase  the  prevailing  disposition,  so  as 
to  lead  to  greater  fluctuations  than  a  metallic  currency  would  ;  foi', 
in  this  country,  paper  money  is  mainly  concerned,  and  that  fluctu- 
ates wholly  and  solely  with  the  state  of  piices  and  transactions  in 
the  district  (where  it  is  issued).  The  amount  cannot  be  increased 
beyond  what  is  called  for.  It  cannot  be  governed  by  any  act  of 
the  banker. 

"  No  country  banking  establishment  can  issue  more  than  there  is 
a  demand  for.  .  .  .  What  has  been  said  of  the  impossibility  of  an 
over-issue  by  country  bankers  does  not  apply  to  the  Bank  of  Eng- 
land. To  a  considerable  degree,  the  Bank  circulation  is  founded 
on  ofovernment  securities,  which  the  witness  thinks  is  the  best 
foundation."  —  Digest,  pp.  70-74. 

Such  are  the  most  material  portions  of  the  evidence  given 
before  the  Committee  by  men  of  the  very  highest  repute  in 
their  respective  callings  ;  men  of  great  wealth,  largely  acquired 
by  their  own  exertions,  and  wielding  a  wide  social  and  j)oliti- 
cal  influence.  Mr.  Ward  and  Mr.  Norman  were  Directors  of 
the  Bank,  while  no  persons  enjoyed  a  greater  reputation  in 
monetary  circles  than  Mr.  Glyn,  Mr.  Loyd,  Mr.  Gurney  and  Mr. 
Grote.  Yet  their  statements  and  conclusions  were  as  gromid- 
less  as,  and  far  less  valuable  than,  the  speculations  of  the  Al- 
chemists as  to  the  proper  combination  of  the  baser  metals 
necessary  to  produce  gold.  The  Alchemists  did  make  some  dis- 
coveries of  great  value,  and  laid  the  foundation  of  a  science 
which,  working  by  exact  methods,  always  advances  the  inquirer 
on  his  way.  The  evidence  or  speculations  of  the  witnesses  be- 
fore the  Committee,  who  were  favorable  to  the  Bank,  did  not 
disclose  a  single  principle,  did  not  lead  to  a  single  discovery, 
in  reference  to  the  laws  of  money.    On  the  contrary,  they  over- 


248  HISTORY   OF    MONETAE Y   THEOKIES. 

laid  the  whole  subject  with  such  a  mass  of  verbiage,  of  false 
assumptions,  of  vain  and  frivolous  distinctions,  that,  like  the 
Report  of  the  Bullion  Committee,  their  conclusions  have  been 
formidable  obstacles  to  the  progress  of  monetary  science. 

Mr.  Loyd,  now  Lord  Overstone,  held  joint-stock  Banks  to 
be  "  deficient  in  every  requisite  but  extended  responsibility." 
In  this  he  was  sustained   by  every   witness  an  absti-act  of 
whose  testimony  has  been  given.     Experience  has  shown  the 
exact  opposite  to  be  the  fact.     All  were  opposed  to  "  plurality 
of  issue."     A  greater  amount  of  gold,  said  Lord  Overstone, 
would  be  required  from  a  greater  number  of  issuers.     A  far 
less  amount  is  required  relative  to  that  of  the  currency  issued, 
for  the  reason,  that,  the  greater  the  number  of  issuers,  the 
greater  the  degree  of  scrutiny  in  making  loans.     Parties  seek- 
ing to  make  them  must  go  to  those  to  whom  they  are  well 
known :  to  go  elsewhere  would  be  a  sufficient  cause  for  dis- 
trust.    "  Plurality  of  issue,"  therefore,  is  a  necessary  condi- 
tion of  a  sound  currency.     Where  there  are  a  great  number  of 
issuers,  as  in  London  and  New  York,  there  will  always  be  set- 
tlements, by  which  each  will  be  compelled  to  make  good  his 
issues  day  by  day.     The  weaker  must  daily  come  up  to  the 
standard  set  by  the  stronger,  in  order  to  insure  confidence  in 
their  issues.     There  can  be  no  "  competition  "  of  issue,  in  the 
sense  in  which  this  word  is  ordinarily  used,  for  the  reason  that 
capital   must    stand    behind   every   issue,   and   must   always 
speedily  discharge  it.     Competition  of  issue,  if  there  can  Jae 
such,  is  competition  in  the  employment  of  capital.     To  this 
there  can  be  no  objection.    Upon  the  same  principle  that  Lord 
Overstone  objected  to  '•  plurality  of  issue,"  would  he  object  to 
plurahty  in  drawers  of  bills.     The  right  to  issue  notes  as  well 
as  to  draw  bills  is  based  upon  the  possession  of  something  to 
issue,  or  draw  against.     If  perfect  freedom  were  allowed,  then 
every  one,  according  to  him,  would  begin  drawing,  and  the 
world  would  soon  be  flooded  with  bills,  —  some  good,  some 
worthless  ;  and  great  losses  would  be  the  result.     He  forgot 
that  it  takes  two  to  give  utterance  to  a  bill,  as  well  as  to  the 
notes  of  a  Bank.     When  a  person  receives  such  notes  as  the 
equivalent  of  what  he  has  to  sell,  he  will  take  good  care  that 
that  which  he  receives  shall  equal  in  value  that  with  which  he 
parts.     Self-interest,  therefore,  is  all  the  check  needed  upon 
plurality  of  issue.     A  person  has  only  to  be  imposed  upon 


COiLMENTS   UPON   THE   EVIDEXCZ,  1832.  249 

once  or  t^ce,  to  refuse  the  issues  of  all  parties  tliat  are  not 
entitled  to  confidence.  A  fe-w  lessons  of  the  kind  will  do  no 
one  any  harm.  The  jjublic  are  just  as  competent  to  take  care 
of  themselves  in  the  matter  of  bank-notes  as  in  bills  of  ex- 
change, or  in  the  purchase  of  property  of  any  kind.  It  is  in 
this  very  matter  of  issue  of  paper  money  that  the  greatest 
scope  and  freedom  should  be  allowed,  not  only  for  the  purpose 
of  placing  it  upon  the  most  stable  foundations,  but  for  the 
purpose  of  supplying,  in  the  place  of  coin,  adequate  instruments 
of  distribution.  It  is  natural  for  an  Englishman  to  repeat  to 
himself,  *'  One  Government,  one  Bank."  That  would  be  all 
very  well,  were  government  possessed  of  all  the  capital  of  the 
countrv.  —  if  it  had  the  same  rigrht  to  the  administration  of 
such  capital  as  it  has  in  the  enactment  and  administration  of 
the  laws.  But  having  no  capital  other  than  that  drawn  from 
the  public  by  taxation,  for  immediate  expenditure,  it  has  no 
more  to  do  with  the  issue  of  paper  money  than  it  has  with 
the  quantity  of  food  to  be  raised,  or  of  yards  of  cloth  to  be 
woven.  According  to  ^Ir.  Ward,  the  public  interest  requires 
the  Bank  to  hold  the  smallest  possible  amount  of  treas- 
ure ;  otherwise  the  currency  would  be  too  much  depressed. 
Properly  managed,  the  amount  of  circulation  would  be  in 
five  or  tenfold  greater  ratio  than  the  amount  of  treasure  held 
by  the  Bank.  Loans  should  never  be  made  for  the  purpose 
of  getting  rid  of  the  gold  held  by  it,  on  the  assumption  that 
its  accumulation  in  the  Bank  is  the  withdrawal  of  a  correspond- 
ing amount  from  the  channels  of  circulation.  Its  accumulation 
in  it  may  simply  mean  its  transfer  from  one  country,  place  of 
deposit,  or  hoard,  to  another.  The  accident  that  brought  it 
into  the  Bank  may  speedily  carry  it  from  it.  In  such  case,  if 
loaned,  it  must  be  collected  from  the  public,  —  a  process  which 
may  cause  no  small  distui-bance  and  loss.  If  the  stock  of  gold 
in  the  Bank  be  permanently  increased,  say  X5,000,000,  its 
loans  might  be  increased  by  ^25,000,000  or  £50,000,000,  the 
gold  ser-sing  as  reserves,  provided  an  adequate  amount  of 
good  bills  were  offered.  That  they  were  not  offered  would  be 
evidence  of  a  want  of  merchandise  to  be  symbolized.  Mr. 
Norman  would  have  no  notes  issued  that  did  not  rest  upon 
secm-ities  other  than  commercial  bills,  —  upon  Exchequer  bills, 
government  stock,  bonds,  lands.  &c.  He  objected  ifi  toto  to 
the  existence  of  joint-stock  Banks  in  London,  or  to  increased 


250  HISTORY  OF   MONETARY  THEORIES. 

competition  among  issuers  of  paper  money.  But  every  person 
possessed  of  merchandise  is  just  as  competent  to  issue  paper 
money  as  the  Bank  of  England  ;  and  far  more  so,  as  the  Bank 
is  now  conducted,  as  his  issues  would  be  based  upon  that 
which  would  return  them  to  him  without  any  act  on  his  part ; 
while  the  Bank  might  have  to  take  in  no  small  part  of  its 
own,  by  paying  out  a  corresponding  amount  of  its  reserves, 
which  it  hardly  ever  does  without  loss  to  itself  as  well  as  the 
public.  According  to  Mr.  Tooke,  there  exists  no  more  reason 
for  two  Banks  than  for  two  mints.  All  paper  money  should  be 
issued,  as  coin  is,  by  government  —  by  the  exclusive  privilege 
of  the  State.  But  the  only  function  of  government  in  coinage 
is  assaying  and  affixing  uj)on  the  piece  assayed  the  quantity 
of  pure  metal  it  contains.  How  can  it  assay  paper  ?  Its  in- 
signia does  not  give  value  in  one  case  ;  how  can  it  in  the  other  ? 
It  creates  no  obligation  when  it  coins  gold ;  and,  if  it  does  not 
when  it  issues  paper,  the  only  effect  of  its  insignia  ujjon  it  is 
to  render  worthless  what  otherwise  might  have  had  value. 
The  value  of  gold  is  measured  by  its  cost ;  that  of  paper,  by 
that  which  it  represents.  If  government  possess  capital, — 
merchandise,  —  it  may  issue  symbols  against  it,  to  serve  in  its 
distribution.  So  far  it  may  secure  to  itself  the  profit  resulting 
from  its  use,  —  that  is,  interest  on  a  sum  equal  to  its  amount. 
It  may,  if  it  will,  turn  banker,  and  issue  notes,  holding  a 
proper  amount  of  reserves.  If  it  would  be  successfid  in  such 
rdle^  it  must  issue  no  paper  that  does  not  represent  merchan- 
dise. But  even  such  a  wild  and  visionary  theorist  as  Tooke 
would  hardly  venture  to  impose  upon  government  such  a 
function.  If  not,  then  he  must  leave  the  issue  of  paj)er 
money  to  those  who  have  capital  to  lend.  "  An  increase  of 
paper  money,"  says  Tooke,  "  is  the  consequence  of  a  tendency 
from  other  causes  to  a  rise  in  prices."  Tooke,  as  will  be  here- 
after seen,  was  the  great  apostle  of  the  doctrine,  that  an  ex- 
cess of  paper  money  follows,  instead  of  preceding,  a  rise  in 
prices.  Mr.  Grote,  like  Mr.  Tooke,  "  would  have  the  Bank 
pay  over  to  the  public  the  profits  of  its  circulation ;  retaining 
such  portion  of  them  as  would  be  a  fair  remuneration  for  the 
trouble  of  administering  it.  A  metallic  currency  Avould  give 
no  protection  against  fluctuation  of  commodities."  How 
could  any  considerable  fluctuation  occur  with  a  currency  ex- 
clusively metallic,  and  so  long  as  equivalents  are  exchanged  ? 


COMMENTS   UPON   THE  EVIDENCE,  1832.  251 

Fluctuations  occur  when  merchandise  is  purchased  on  credit 
in  some  form,  and  when  the  credit  is  not  the  equivalent  of 
that  purchased  by  it.  In  such  case,  credits,  as  well  as  capital, 
are  competitors  in  the  market,  and  prices  rise  in  ratio  to  their 
quantity,  or  to  the  demand.  When  the  credits  mature,  and 
payment  is  not  made,  then  the  prices  of  merchandise  which 
has  been  purchased  and  held  on  speculation  fall,  from  being 
thrown  upon  the  market.  So  long  as  paper  money  is  the 
representative  of  merchandise  in  demand  for  consmnption, 
the  effect  of  its  issue  upon  the  whole  market  is  to  reduce, 
instead  of  to  increase,  prices,  by  discharging  a  corresponding 
amount  —  or  a  certain  amount  —  of  capital  from  use  as  money. 
"  Fluctuations  would  occur,"  says  Mr.  Grote,  "^  in  a  currency 
referrible  to  any  definite  standard  whatever  ;  and,  doubtless, 
our  standard  is  less  liable  than  any  other  to  variations."  This 
single  paragraph  epitomizes  whatever  of  speculation  and  theory 
there  is  in  England  upon  the  subject  of  money :  "  Fluctu- 
ations are  inevitable  in  all  systems;  but  ours  is  the  best." 
Mr.  Glyn  opposed  plurality  of  issues  on  the  ground  that  the 
natural  incHnation  of  all  Banks  is  to  seek  profit  for  their 
proprietors  by  extending  their  issues ;  forgetting  that  the  only 
check  to  such  inclination  is  to  place  all  issues  in  a  position 
in  which  they  cannot  indulge  in  any  thing  of  the  kind  without 
being  immediately  called  to  account.  Mr.  Gurney  held  that 
"  no  country  banking  establishments  can  issue  more  notes  than 
there  is  a  demand  for."  There  will  always  be  a  demand  for 
whatever  issues  are  made,  so  long  as  they  will  be  the  equiva- 
lent of  capital  to  the  holders.  There  is  no  more  limit  to  the 
demand  for  paper  money,  so  long  as  it  will  exchange  for  any 
thing,  than  there  is  for  capital.  Mr.  Gurney,  like  the  other  wit- 
nesses favorable  to  the  Bank,  held  that  paper  money  should 
be  based  upon  governments  in  preference  to  bills ;  that  is, 
that  the  principles  upon  which  the  operations  of  the  Bank 
were  conducted  were  wise  and  proper. 

Those  who  were  examined  as  representatives  of  joint-stock 
Banks  —  Mr.  Stuckey,  Mr.  Wilkins,  Mr.  Dyer,  Mr.  J.  B.  Smith, 
and  Mr.  Burt  —  ventured  mildly  to  suggest,  that  Free-Trade 
might  prove  as  advantageous  in  banking  as  in  commercial  and 
manufacturino-  industries  ;  and  that  in  ratio  as  such  freedom  was 
secured  at  the  expense  of  the  exclusive  privileges  of  the  Bank 


252  HISTORY    OF    MOXETAEY   THEOEIES. 

of  England  would  the  value  and  stability  of  the  country  cir- 
culation of  all  kinds  be  increased.  Such  representations  —  com- 
ing from  feeble  and  struggling  institutions,  as  they  were  at 
the  time  —  had  no  more  influence  over  the  public  mind  than 
would  propositions  at  the  present  day  for  the  abolition  of  the 
House  of  Lords  and  the  distribution  of  the  lojal  revenues  — 
even  the  crown  itself  —  among  the  people.  Englishmen  bow 
reverently  before  quantity  and  force.  These,  under  their  sys- 
tem, —  which  allows  great  freedom  to  individual  action,  and 
secures  to  it  its  proper  reward,  —  are  the  certain  product  of  time. 
The  joint-stock  Banks,  which  existed  in  the  outset  by  suffer- 
ance as  it  were,  biding  their  time,  have  now  grown  into  such 
colossal  proportions  as  to  challenge  the  reverence  which  the 
Bank  of  England  once  wholly  engrossed  ;  and  their  managers, 
who  for  a  long  time  stood,  hat  in  hand,  in  presence  of  its 
Directors,  now  do  not  scruple  to  hustle  them  off  the  walk 
whenever  the  crowd  is  too  dense  for  ease  of  movement.  The 
very  privileges  and  monopoly  of  the  Bank  have  now  come  to 
involve  great  burdens  and  great  responsibilities.  As  "  man- 
ager of  the  currency,"  it  has  to  supply  reserves  for  that  of  the 
whole  kingdom  ;  amounting,  including  deposits  as  well  as  notes, 
to  some  £550,000,000.  The  least  disturbance  in  the  money 
market,  or  in  commerce  and  trade,  or  the  slightest  foreign  com- 
plication, are  warnings  to  the  Bank.  How  to  strengthen  its 
position  and  increase  its  reserves  has  for  years  been  the  para- 
mount question  in  the  monetary  and  commercial  circles  of 
England.  At  present  its  only  means  of  defence  is  in  its  power 
of  exacting  exorbitant  rates  on  its  loans.  This  is  a  very  feeble 
one  against  an  excited  crowd  ready  to  sacrifice  whatever  they 
possess  for  the  maintenance  of  their  credit.  In  olden  times, 
the  Directors  of  the  Bank  might  set  its  operations  upon  a 
given  key,  and  go  to  sleep  for  a  half  century.  The  rates  now 
charged  appear  and  disappear  with  the  celerity  of  the  figures 
in  Punch  and  Judy.  The  wider  the  discussion  of  the  problem, 
the  more  difficult  appears  its  solution.  Fortunately,  in  such  a 
country  as  England,  where  every  valuable  achievement  or  step 
that  is  gained  serves  as  vantage-ground  for  something  beyond, 
all  such  questions  solve  themselves.  From  the  foundation  of 
the  Bank  in  1694  to  1797,  there  was  very  little  fluctuation 
in  commercial  or  monetary  affairs,  for  the  reason  that  it 
was  an  instrument  of  commerce,  not  of  the  government.     Its 


C0:M3IENTS   upon   the   evidence,    1832.  253 

loans  were  made  upon  such  securities  only  as  were  fitted 
to  return  to  it,  in  their  payment,  its  own  liabilities.  It  was 
for  more  than  one  hundred  years  restricted  by  its  charter  from 
dealing  in  any  tiling  but  "  bills  of  exchange  and  gold  and  silver 
bullion."  The  result  was  uniformity  in  the  volume  of  the  cur- 
rency, and  in  the  operations  of  production  and  trade.^  From 
1797  to  the  present  time,  it  has  been  little  more  than  an  arm  of 
the  government.  The  result  has  been  constant  and  excessive 
fluctuations  in  such  operations.  Although  nominally  the  man- 
ager of  the  currency,  it  has  never  attempted  to  manage  any 
but  its  own.  Such  as  it  has  issued,  being  at  all  times  largely 
based  upon  governments,  has  necessarily  been  a  great  disturb- 
ing element  in  financial  affairs.  This  evil,  so  deeply  grounded, 
could  only  be  reformed  by  a  currency  properly  issued,  and 
sufiicient  in  amount  for  the  exchano-es  of  the  countrv.  Such 
a  currency  has  now  been  created  through  the  action  of  parties 
and  institutions  other  than  the  Bank,  and  in  such  volume  that 
the  disturbing  influence  of  the  latter  is  no  longer  paramount. 
It  is  taken  up  and  absorbed  into  the  greater  magnitude  of 
that  with  which  it  moves.  In  this  way,  by  a  new  growth,  the 
English  sj'stem  of  finance  is  passing  from  a  condition  of 
excessive  fluctuation,  due  to  its  inherent  defects,  to  one  of  com- 
parative uniformity  both  as  to  quantity  and  value.     The  joint- 

1  Although,  for  a  long  time  previous  to  the  repeal,  in  1703,  of  the  provision 
in  the  charter  of  tlie  Bank  forbidding  it  to  make  loans  to  government,  the 
obligations  of  the  latter  were  largely  made  use  of  by  its  customers  as  the  basis  of 
loans,  or  as  collateral  to  them,  borrowers,  undoubtedly,  frequently  preferred 
to  make  loans  upon  "  public  securities "  rather  than  upon  bills ;  holding  the 
latter  to  meet  their  loans  on  "  securities,"  when  they  fell  due.  Loans  made  at 
Bank  by  private  parties  are  not  for  the  purpose  of  supplying  to  tliem  the 
means  of  consumption,  but  for  use  in  their  various  industries  or  callings. 
None  but  the  thrifty  classes  could  get  access  to  it :  tliere  is,  therefore,  no  reason 
to  suppose  that  the  greater  part  of  the  loans  made  by  the  Banks  previous  to 
1793  were  not  properly  made,  although  only  a  portion,  and  sometimes  the 
smaller  portion,  of  them  seemed  to  be  made  upon  bills.  This  assumption  is  fully 
supported  by  the  experience  of  the  Bank  through  more  than  a  century,  during 
which  the  fluctuations  in  its  issues,  as  well  as  in  production  and  trade,  were  very 
slight.  A  government  is  a  very  different  kind  of  borrower  from  an  individual ; 
as  its  loans  are  made,  not  for  the  purpose  of  supplying  symbols  for  the  dis- 
tribution of  merchandise,  but  for  its  profitless  consumption.  Loans  to  individ- 
uals tend  to  keep  the  volume  of  currency  uniform,  as  they  serve  as  the  basis  of 
reproducing  merchandise  (which  will  also,  in  its  turn,  be  symbolized),  equal  to, 
and,  perhaps,  greater  in  amount  than,  that  which  has  been  consumed.  Loans  to 
the  government  tend  to  disturb  such  imiformity ;  for  the  reason,  that  that  which 
Ib  borrowed  is  not  repeated  in  kind,  but  is  unproductively  expended. 


254  HISTORY   OF    MONETARY   THEORIES. 

stock  Banks  and  private  Banks  and  bankers  are  now  the  issuers 
and  managers  of  tlie  currency,  while  the  Bank  contents  itself 
with  the  more  humble,  but  still  honorable,  office  of  the  safe- 
keeping of  the  reserves  of  those,  by  whom,  as  issuers  of  the 
currency,  it  is  now  in  great  measure  supplanted. 

While  the  evidence  given  before  the  Committee,  already 
quoted,  sufficiently  illustrates  the  ideas  prevailing  at  the  time 
upon  the  subject  of  money,  and  upon  the  questions  considered 
by  it,  the  following  summary  of  the  evidence  given  before  it 
by  Mr.  J.  Horsley  Palmer,  then  Governor  of  the  Bank,  and 
Mr.  Ward  and  Mr.  Norman,  Directors,  will  illustrate  the  sys- 
tem of  management  which  prevailed  from  the  panic  of  1826  to 
1837,  —  and,  in  fact,  to  1844,  when  the  great  change  in  its 
organization  took  place  :  — 

"  The  principal  functions  which  it  is  the  ordinary  duty  of  the 
Bank  to  perform,  consist  in  its  furnishing  the  public  with  paper 
money,  convertible  on  demand  into  coin  and  bullion,  and  in  afford- 
ing a  place  of  safe  deposit  for  the  money  of  the  government,  as 
well  as  for  that  of  individuals  who  may  prefer  it  to  a  private  Bank. 

"  It  is  not  deemed  desirable  that,  in  ordinary  times,  the  Bank  of 
England  should  systematically  regulate  the  amount  of  its  issues, 
through  commercial  discounts  in  London.  There  are,_  usually,  in 
the  possession  of  the  bankers  of  London,  and  other  individuals, 
large  deposits  waiting  for  employment,  with  which  it  would  not 
become  the  Bank  to  interfere.  But  upon  occasions  when  there  is 
a  scarcity  of  money,  or  when  a  season  of  commercial  alarm  occurs, 
it  is  then  the  duty  of  the  Bank  to  step  forward  to  the  aid  of  ]iublic 
and  private  credit,  by  discounting  commercial  bills.  The  Bank, 
for  this  purpose,  occasionally  fix,  by  official  notice,  a  public  rate  of 
interest,  at  which  they  are  willing  to  receive  approved  bills  of  a 
given  description.  Being  the  only  body  issuing  money  ad  libitum^ 
within  the  sphere  of  the  circulation  of  such  biUs,  the  Bank  define 
the  maximum  rate  of  interest,  by  such  notice,  during  its  continu- 
ance. The  consequence  is,  that  all  persons  having  money  to  em- 
ploy must  necessarily  offer  to  lend  it  under  that  rate,  unless,  by 
the  pressure  of  the  moment,  the  market  rate  of  interest  advance 
to  that  fixed  by  the  Bank. 

"  But  in  ordinary  times,  when  there  is  no  such  scarcity  of  money, 
or  when  no  commercial  discredit  exists,  if  the  Bank  Avere  to  found 
their  issue  priucipally  upon  commercial  bills,  they  would  be  under 
the  necessity  of  entering  into  competition  with  all  other  parties  in 
the  purchase  of  bills  of  exchange,  at  the  market  rate  of  interest. 
Such  competition  would  be  justly  deemed  objectionable.  All 
banking  business  is  better  done  by  private  bankers  than  by  public 
bodies."   More  facilities  are  afforded  in  the  way  of  credit  by  the 


MANAGEMENT   OF   THE   BANK.  2oO 

former,  than  can  be  offered  under  the  existing  regnhitions  by  the 
Bank  Directors,  who  give  no  credit  to  any  one,  and  exact  an  adher- 
ence to  foi-ms  which  are  not  required  by  private  bankers. 

"  No  inflexible  rule,  indeed,  exists  that  the  Bank  shall  not,  even 
in  ordinary  times,  afford  accommodation  to  the  commercial  classes. 
But  the  BuTik  do  not,  in  general,  found  their  issue  upon  commer- 
cial discounts.  According  to  their  present  principles  of  manage- 
ment, they  extend  their  assistance  in  that  way  only  when  any 
serious  exigency  arises.  Being  required  to  ])rovide  a  requisite  supply 
of  money  for  the  average  circulation  of  the  sphere  in  which  they 
act,  it  is  also  their  duty  to  uphold  public  and  private  credit  when 
called  upon  ;  and,  when  so  appealed  to,  it  is  then  that  the  resources 
of  a  great  body  like  the  Bank  of  England  may  be  rendered  avail- 
able to  the  commercial  stability  of  the  country. 

"  In  the  latter  part  of  the  year  1825,  when  the  great  panic 
occurred,  the  discounts  of  the  Bank  rose  to  about  fifteen  millions. 
The  interest  was  raised  from  four  to  five  per  cent,  with  a  view  to 
limit  the  issue  ;  but  it  did  not  produce  the  desired  effect.  On  other 
occasions,  it  might  be  more  successful ;  and  it  seems  much  better, 
when  possible,  to  diminish  the  issue  upon  bills,  by  raising  the  rate 
of  interest,  than  by  caprice,  by  rejecting  a  portion  of  the  paper  that 
is  offered.  .  .  . 

"  Since  the  resumption  of  cash  payments,  which  can  hardly  be 
said  to  have  been  completely  under  the  control  of  the  Bank  until 
after  the  events  of  1825,  and  the  entire  supjiression  of  the  £1  and 
£2  notes  in  the  country,  the  rule  of  that  establishment  has  been  to 
preserve  in  its  coffers  an  amount  of  bullion  equal  to  one-third  of  the 
whole  of  its  liabilities.  Thus,  if  we  assume  the  circulation  to  be 
£21,000,000,  and  the  deposits  to  be  £6,000,000,  the  Bank  would 
then,  according  to  its  principles  of  manngement,  retain  £9,000,000 
in  bullion  in  a  period  of  full  currency.  The  currency  is  said  to  be 
full  when  the  exchanges  are  at  par,  or,  rather,  when  they  are  on 
the  point  of  becoming  unfavorable,  prior  to  the  commencement  of  a 
demand  for  bullion.  In  that  state  of  things,  the  circulation  of  the 
Bank  is  supposed  to  be  neither  more  nor  less  than  is  necessary  for 
the  transactions  of  the  country.  The  moment  the  exchanges  be- 
come unfavorable,  the  fact  is  discovered  by  a  demand  for  gold  at 
the  Bank  ;  and,  as  notes  must  then  be  given  by  the  parties  who 
wish  to  procure  it,  the  consequence  is,  that  the  circulation  becomes 
pi'O  tanto  diminished,  and  the  gold  obtained  in  lieu  of  the  notes 
goes  abroad.  When  the  demand  ceases,  and  the  exchanges  take  a 
favorable  turn,  then  the  Bank  is  in  a  progressive  state  towards  re- 
assuming  its  proportion  of  bullion.  In  iNIay,  1832,  the  resignation 
of  Lord  Grey's  ministry  having  produced  great  agitation  through- 
out the  country,  there  was  a  drain  for  gold  upon  the  Bank,  arising 
entirely  out  of  political  distrust.  Before  that  drain  began,  the 
bullion  in  the  Bank  amounted  to  about  £6,o00,000.  The  total  absorp- 
tion of  gold  which  took  place  at  that  period,  including  the  sums  paid 
on  account  of  dividends,  was  near  £2,000,000.  Nevertheless,  after 
the  drain  had  ceased,  the  bullion  in  the  Bank  had  accunudated  to 
£5,500,000,  in  consequence  of  there  having  been  a  natural  influx 


256  HISTORY   OF    MONETARY    THEORIES. 

of  gold  during  that  interval ;  and  that,  too,  at  a  very  high  rate  of 
exchange. 

"  But  when  the  drain  upon  the  Bank  for  gold  arises  from  the  un- 
favorable state  of  the  foreign  exchanges,  and  bullion  is  wanted  for 
exportation,  then  the  Bank  would  wait,  under  ordinary  circum- 
stances, until  the  exchanges  should  take  a  turn  the  other  way, 
before  it  would  replenish  its  coffers.  If,  however,  an  extraordinary 
demand  arose,  and  continu(?d  to  go  on  increasing,  the  Directors,  in 
order  to  provide  for  the  safety  of  the  Bank,  would  have  recourse 
to  operations  for  the  contraction  of  the  circulation.  Thus,  fur  in- 
stance, if  they  foresaw  a  bad  harvest,  or  any  other  circumstance 
likely  to  turn  the  exchanges  against  the  country,  they  would,  even, 
if  the  exchanges  were  at  the  moment  favorable,  anticipate  their 
becoming  unfavorable,  and  make  their  preparations  accordingly. 
They  would,  in  such  a  case,  proceed  to  shorten  the  amount  of  the 
currency  in  this  way.  The  Bank  is  possessed  of  a  certain  number  of 
securities,  always  coming  into  it.  A  considerable  amount,  of  these 
arises  from  the  annuities,  the  dead  weight,  and  other  assets  of  that 
description.  These  moneys  they  would  not  reissue.  If  they  had 
silver  at  their  disposal,  they  would,  perhaps,  as  a  further  measure, 
send  it  to  Paris,  and  draw  against  it;  and,  finally,  if  the  extraor- 
dinary necessity  of  the  case  required  it,  they  would  sell  all  their 
Exchequer  bills,  and  reduce  the  amount  of  their  other  securities. 
They  would  not  thus  forcibly  contract  their  issues  in  anticipation 
of  uncertain  events,  or  of  events  not  likely  to  be  of  any  magnitude. 
Their  object  in  taking  such  precautions  would  be  to  prevent  sud- 
den jerks  in  the  currency,  and  to  provide  against  the  extraordinary 
demand  they  saw  coming,  before  it  was  actually  at  their  door. 
If  they  did  not  thus  anticipate  the  period  of  the  exchanges  becoming 
unfavorable,  they  wouM  have  to  buy  gold  at  a  very  high  price,  and 
to  furnish  those  who  demanded  it  in  exchange  for  notes  at  a  low 
price  ;  the  Bank  losing  the  diiference  upon  the  transaction.  .  .  . 

"  But,  Avhen  matters  assume  this  momentous  character,  the  con- 
duct of  the  Bank  becomes  a  question  of  State  policy :  and  it  is  but 
justice  to  that  institution  to  remember,  that  when  it  was  within  a 
few  hours  of  losing  all  its  gold,  in  consequence  of  the  panic  of 
1825,  instead  of  separating  itself  from  the  interests  of  the  country, 
it  was  deliberately  identified  with  them  ;  and  the  resolution  was 
taken,  that  the  interests  of  the  Bank  and  the  nation  should  fall  or 
stand  together.  It  should  never  be  forgotten,  that  all  the  princi- 
ples of  management  upon  which  the  Bank  ordinarily  acts  were 
flung  to  the  winds  upon  that  occasion  ;  and  that  their  discounts 
and  advances  upon  all  kinds  of  securities  Avere  swelled  to  upwards 
of  fifteen  millions,  at  an  hour  when  their  bullion  was  reduced  below 
one. 

"  If,  therefore,  an  emergency  should  arise,  in  which,  referring  to 
their  general  rules,  the  Directors  might  deem  it  prudent  to  con- 
tract their  circulation,  they  Avould  probably  recollect  that  no  state 
of  commercial  alarm  has  ever  yet  affected  the  character  of  the 
Bank  ;  but  that,  on  the  contrary,  the  credit  of  that  establishment 
has  risen  above  the  common  credit  of  other  bodies  of  individuals, 


MANAGEJtIEXT   OF   THE   BAXK.  257 

at  such  periods,  higher  than  at  any  other  time.  There  is  little 
doubt  that,  under  such  circumstances,  the  Governor  would  com- 
municate with  his  Majesty's  ministers,  and  consult  with  them  as  to 
what  would  be  the  most  expedient  course  for  the  Bank  to  adopt, 
with  a  view  to  the  general  welfare  of  the  kingdom.  There  is  no 
resolution  recorded  on  the  point,  whether  the  Directors  shall  wait 
until  the  demand  for  gold  actually  arises,  before  they  contract  the 
currency,  or  whether  they  shall  antici])ate  the  period  of  such  de- 
mand. But  there  is  not  one  person  in  the  Directors  who  does  not 
consider  it  a  sacred  duty  to  do  always  the  very  best  that  can  be 
done,  in  order  to  preserve  the  principle  of  the  currency. 

"  During  the  last  two  years,  the  Directors  of  the  Bank  have 
spontaneously  taken  no  measures  for  the  purpose  of  contracting 
the  circulation.  Whatever  diminution  has  occurred,  has  been 
effected  almost  entirely  by  the  return  of  notes  for  gold.  Their 
policy  is  to  keep  in  view  the  foreign  exchanges  and  the  state  of  the 
bullion  market ;  and  to  be  prepared  for  the  increase  of  their  issue 
when  favorable,  as  well  as  for  a  diminution  of  it  when  they  are 
unfavorable,  seeing  that  such  increase  and  diminution  would  take 
place  if  there  were  no  notes  in  existence.  With  the  exception  of 
the  special  circumstances  above  alluded  to,  the  principle  of  the 
Bank  is,  when  the  currency  is  full,  and  the  exchanges  consequently 
at  par,  to  invest  and  retain  in  securities  bearing  interest  the  pro- 
portion already  mentioned  of  the  deposits,  and  the  value  already 
received  from  the  notes  in  circulation,  the  remainder  to  be  held  in 
coin  and  bullion  ;  the  circulation  of  the  whole  currency  of  the 
country,  so  far  as  the  same  may  depend  upon  the  Bank,  being  sub- 
sequently regulated  by  the  action  of  the  foreign  exchanges.  What- 
ever power  the  Bank  may  have  in  reference  to  the  currency,  they 
are  very  desirous  not  to  exercise  it,  but  to  leave  individuals  to  use 
the  right  which  they  possess  of  returning  bank-notes  for  bullion. 
The  exchanges  ar^  in  due  season  corrected,  when  left  wholly  in  the 
hands  of  the  community.  If  the  Bank  be  adequately  supplied 
with  bullion,  as  they  usually  are,  when  the  exchanges  are  full  they 
experience  no  inconvenience  by  waiting  to  have  the  exchanges 
corrected  by  the  operations  of  the  public."  ^ 

Such  is  a  picture  of  the  management  of  the  Bank  from  the 
time  that  it  fairly  surmounted  the  effects  of  the  Act  of  Re- 
striction to  1844,  and  in  reality  from  that  to  the  present 
time.2  The  Bank,  in  possession  of  great  sums  from  depositors, 
used  them  in  the  purchase  of  securities,  wholly  regardless  of 
the  consequences.  Loans  of  deposits  made  in  the  purchase  of 
governments  do  not  necessarily  cause  an  inflation.  None, 
certainly,  would  be  caused,  if  depositors,  instead  of  put- 
ting their   money  into   the   Bank,   had   invested   it   in    the 

1  Quinn's  Trade  of  Banking  in  England,  pp.  4-G,  85-96. 

2  The  following  statement  will  show  the  character  of  the  loans  of  the  Bank, 

17 


258  HISTOET  OF  MONETARY   THEORIES. 

same  manner  as  the  Bank.  The  same  amount  -would  be  in 
circulation  after  as  before.  It  would  only  have  changed 
hands.  Sales  and  purchases  made  by  individuals  produce  little 
disturbance,  for  the  reason  that  they  do  not  usually  act  in 
mass,  —  in  one  direction.  It  is  not  when  the  Bank  purchases 
governments,  but  when  it  seeks  to  sell  them,  that  the  mis- 
chievous character  of  the  transaction  shows  itself.  When  it 
wishes  to  seU,  it  cannot.  To  go  into  the  market  with  its  securi- 
ties in  seasons  of  great  pressure,  or  in  a  panic,  would  only 
serve  to  increase  the  run  upon  it.  Should  it  attempt  this,  it 
would  only  be  an  additional  competitor  for  money  which  it 
would  have  to  pay  out  again  as  soon  as  received.  It  might  be 
utterly  powerless,  from  inabihty  to  convert  its  means.  In 
such  a  crisis,  the  public  do  not  want  securities,  but  money, 
—  that  which  will  instantly  discharge  their  liabilities.  If,  on 
the  other  hand,  its  loans  were  made  wholly  in  the  discount 
of  bills,  no  panic,  or  run  upon  it,  could  arise,  that  could  not 
be  speedily  checked  by  a  refusal  to  make  further  discounts. 
There  can  be  no  considerable  inflation,  so  long  as  the  currency 
is  S}TnboHc,  for  the  reason  that  the  public,  in  such  case,  deal 
in  actual  values,  —  in  equivalents,  whose  real,  or  represen- 
tative, equals  their  nominal  value.  A  panic  arises  only  when  it 
is  seen  or  feared  that,  in  the  exchanges  that  have  taken  or  are 
taking  place,  equivalents  are  not  exchanged,  —  that  the  cur- 
rency does  not  entitle  its  holder  to  a  corresponding  amount  of 
capital.     If  such  fear  or  suspicion  become  a  conviction,  there 

and  of  its  assets,  other  than  its  share  capital,  as  they  were  on  the  29tli  of  Feb- 
ruary, 1832. 

Exchequer  bills £6,834,940 

Advances  on  account  of  the  purchase  of  the  annuity 

of  £585,740  for  44  years 10,897,880 

Stock  purchased 764,600 

City  bonds 600,000 

Loans  on  mortgages 1,452,100 

London  Dock  Company 227,500 

Advanced  on  security  and  various  articles 570,690 

Bills  discounted 2,951,970 

Coin  and  bullion 5.293,150 

Total £29,492,830 

Of  its  advances  on  various  accounts,  only  one  tenth  was  in  commercial  bills. 
Its  liabilities  of  the  same  date  were:  notes,  £18,051,710 ;  deposits,  £8,937,160: 
total  of  £26,988,870.     Its  rest,  or  accumulated  earnings,  equalled  £2,637,760. 


MANAGEMENT    OF   THE   BANK.  259 

is  a  contest  of  speed  to  see  who  shall  secure  to  himself  what- 
ever reserves  the  issuer  of  the  currency  may  hold.  If  this  be 
issued  in  large  amount,  the  panic  may  become  excessive  and 
general,  involving  issuers  whose  currency  was  purely  symbolic, 
as  well  as  those  whose  currency  was  wholly  fictitious.  As  a 
rule,  no  issuer  of  currency,  no  matter  how  legitimate,  will  be 
able  to  liquidate  all  his  liabilities  upon  the  instant.  As  the 
parties  to  whom  the  issues  upon  bills  have  been  made  are  the 
very  ones  who  undertake  to  return  them,  they  will,  so  long  as 
they  are  solvent,  seldom  or  never  seek  to  draw  coin  for  what 
they  may  hold,  when  they  must  speedily  return  it  to  the  Bank 
in  pajTuent  of  their  bills.  The  danger  arises  when  there  are 
no  reciprocal  obligations  between  the  issuer  and  holder  of  cur- 
rency. If  the  Bank  were  to  make  an  issue  in  the  purchase  of 
government  stock,  for  example,  against  a  large  amount  of  gold 
which  it  might  happen  to  hold,  it  might  have  to  provide  all 
the  means  for  taking  it  in ;  and  it  would  be  almost  certain  to 
have,  not  the  support,  but  the  opposition,  of  the  public,  who 
would  not  only  refuse  to  purchase  its  securities,  by  the  sale  of 
which  it  must  replenish  its  means,  but  present  all  the  notes  they 
held  for  pa3Tnent  in  coin.  What  adds  to  the  peril  is,  that  the 
Bank  must,  as  a  "  manager  of  the  currency,"  issue  to  all  par- 
ties who  come  within  its  rules  in  the  matter  of  security,  — 
rules  that  were  established,  very  likely,  when  the  demand  for 
money  was  far  below  the  supply.  The  public,  in  such  case, 
not  the  Bank,  are  the  judges  of  the  amount  of  money  required. 
Its  only  means  of  defence  is  in  its  power  to  raise  the  rate  of 
interest  to  a  point  that  shall  render  it  unprofitable  for  them 
to  borrow,  —  a  most  impotent  defence,  as  the  catastrophic s 
of  1847,  1857,  and  1866,  abundantly  prove. 

The  state  of  the  exchanges  is  a  wholly  inadequate  test 
whereby  to  regulate  the  issues  of  the  Bank,  for  the  reason  that 
the  causes  which  are  to  render  them  unfavorable  may  be  in 
most  active  operation  at  the  very  time  they  are  in  the  highest 
degree  favorable  —  when  every  thing  wears  the  appearance  of 
the  greatest  prosperity.  The  currency  may  be,  and  often  is,  ex- 
cessive in  amount — more  than  full  — long  before  the  exchanges 
become  unfavorable.  Such,  indeed,  is  usually  the  case.  To 
take  them  as  a  rule  for  the  regulation  of  the  currency  has  the 
same  and  no  hicrher  wisdom  than  to  lock  the  door  after  the 
horse  is  stolen.     Gold  is  not  exported,  as  Smith  and  the  Econo- 


260  HISTORY  OF   MONETABY  THEORIES. 

mists  assume,  the  moment  an  excess  of  paper  is  issued ;  but 
only  when  the  paper  has  been  expended  in  the  purchase  of  that 
which  can  be  paid  for  only  in  gold.  The  final  pajonent  in 
gold,  with  the  facilities  which  now  exist  for  renewing  and  ex- 
tending banker's  credits,  may  be  put  off  for  years  ;  so  that  the 
state  of  exchanges  may  not,  for  years,  sufficiently  indicate  the 
financial  condition  of  a  country.  A  rule  or  test,  to  be  worth 
any  tiling,  must  be  that  which  shall  prevent  the  possibility  of 
an  adverse  exchange,  which  shall  put  it  out  of  the  power  of  a 
people  to  consume  more  than  they  possess  or  produce.  This 
can  only  be  done  by  restricting  the  currency  to  the  amount  of 
merchandise  fitted  for  consumption ;  the  instruments,  to  the 
means  of  expenditure.  This  done,  exchanges  could  never  be 
long  unfavorable,  and  never  excessively  so.  In  the  ratio  that 
such  rule  is  not  followed,  —  in  the  ratio  that  the  currency  is  not 
symbolic,  —  will  the  exchanges  be  unfavorable  ;  the  degree  of 
aberration  in  one  case  measuring  very  accurately  that  in  the 
other. 

The  agreeable  picture  drawn  by  Mr.  Palmer  and  his  asso- 
ciates of  their  happy  lot  as  managers  of  the  Bank,  ha\'ing 
nothino;  to  do  but  to  allow  the  oscillations  in  the  amount  of 
its  circulation  and  coin  to  regulate  themselves  with  a  certainty 
and  uniformity  far  transcending  human  skill,  was  soon  to  give 
place  to  a  very  difierent  one.  The  oscillation  which  carried 
gold  into  the  Bank  in  1832  and  1833  began,  in  1834,  to  carry 
it  in  an  opposite  direction.  The  amount  held  by  it  on  the 
31st  of  August,  1833,  was  £10,870,000.  This  was  reduced, 
on  the  31st  of  August,  1834,  to  £7,303,000;  on  the  31st  of 
August,  1835,  to  £6,255,000 ;  and  on  the  21st  of  February, 
1837,  to  £4,077,000,  —  the  last-named  sum  equalling  only  one- 
seventh  of  its  liabilities,  instead  of  one-third,  according  to 
the  rule  claimed  to  have  been  laid  down  for  the  management  of 
the  Bank.  The  reduction  in  the  amount  of  specie  in  the 
three  and  a  half  years  equalled  £6,793,000.  In  the  same 
period  its  note  circulation  was  reduced  from  £19,925,000  to 
£18,165,000;  its  deposits  from  £11,927,000  to  £10,040,000: 
the  total  reduction  being  only  £3,647,000,  —  a  sum  equal- 
ling only  about  half  of  the  reduction  in  the  amount  of  its 
coin.  The  balance  of  the  coin  lost,  that  is,  £3,146,000, 
must  have  been  paid  out  in  new  loans  ;   these  being  increased 


MANAGEMENT   OF   THE   BANK.  261 

from  £23,245,000,  in  1833,  to  X  27,297,000,  in  1837.  The 
action  of  the  Bank,  therefore,  in  increasing  its  loans  while  its 
specie  was  being  withdrawn,  was  enough  to  defeat  the  opera- 
tion of  the  rule  laid  down  for  its  guidance,  assuming  its  com- 
petency when  no  increase  of  loans  was  made.  As  there  was 
no  evidence  that  a  return  flow  of  specie  was  likely  to  set  in, 
and  as  great  alarm  and  disturbance  in  monetary  circles  were 
the  natural  consequences,  Mr.  Palmer  felt  called  upon  to  ex- 
plain the  reason  why  the  rule  was  no  longer  observed,  or 
refused  to  work.  This  he  attempted  to  do  in  an  elaborate 
essay  published  in  the  early  part  of  1837. 

"The  system"  (prescribed  for  the  conduct  of  the  Bank),  he 
said,  "  appeared  to  work  satisfactorily,  and  without  any  forced  action 
on  part  of  the  Bank  in  contracting  its  circulation.  It  was  tried 
upon  the  change  of  government  in  France  in  July,  1830,  when 
credit  throughout  that  kingdom  was  shaken  to  its  foundation.  At 
that  period,  the  Bank  of  England  was  possessed  of  about  twelve 
milUons  of  bulUon.  Immediately  upon  the  events  referred  to  tak- 
ing place,  the  currency  of  England  exhibited  an  excess  comjjared 
with  that  of  France  and  other  parts  of  Europe,  The  consequence 
of  that  derangement  between  the  currencies  of  this  and  other  coun- 
tries was  a  continued  diminution  of  the  bulHon  held  by  the  Bank 
from  July,  1830,  to  February  or  March,  1832,  when  the  increased 
value  of  money  in  England,  and  the  gradual  restoration  of  credit 
upon  the  Continent,  gave  a  favorable  turn  to  the  foreign  exchanges  ; 
which  continued  in  our  favor  till  the  autumn  of  1833,  at  which 
time  the  bulUon  in  deposit  at  the  Bank  amounted  to  nearly  eleven 
millions.  At  this  period,  an  exportation  of  the  precious  metals 
again  commenced,  from  causes  that  will  hereafter  be  explained, 
as  well  as  the  reason  why  that  system,  which  appeared  to  adjust 
itself  so  satisfactorily  from  1830  to  1832,  failed  from  1833  to  1836: 
for,  although  during  the  former  period  the  bullion  of  the  Bank 
was  diminished  from  twelve  to  five  millions,  yet  in  the  progress 
of  this  reduction,  as  there  Avas  no  excitement,  and  no  undue  credit 
given  by  the  Banks  in  the  interior  of  the  country,  the  interest 
of  money  gradually  rose  from  2i  to  4  per  cent  per  annum  for  first- 
rate  commercial  paper ;  and  then,  without  discredit  or  distrust  of 
any  kind,  the  bullion  returned  into  the  coffers  of  the  Bank,  and 
money  nearly  resumed  its  former  value,  the  rate  of  interest  having 
gradually  fallen  from  4  to  2|  per  cent  in  July,  1833,  .  .  . 

"  But,  before  preceding  farther,  it  is  necessary  to  allude  to  the 
rise  and  progress  of  joint-stock  Banks  in  England,  Wales,  and 
Ireland.  Scotland  having,  fortunately  for  that  part  of  the  empire, 
kept  itself  fi-ee  from  the  mania  for  the  extension  of  these  com- 
panies, it  is  unnecessary  particularly  to  allude  to  the  proceedings 
of  its  Banks, 

"  Immediately  subsequent  to  the  panic  of  1825,  which  affected 


262  HISTORY  OF  MONETARY  THEORIES. 

almost  every  banking  establishment  in  London  as  well  as  the 
country,  the  government  of  that  clay  was  unfortunately  induced 
to  call  upon  the  Bank  of  England  to  relinquish,  beyond  sixty-five 
miles  from  London,  its  exclusive  privileges  as  to  the  number  of 
partners  authorized  by  law  to  be  associated  for  the  formation  of 
Banks,  in  order  to  enable  ministers  to  frame  regulations  authorizing 
the  establishment  of  joint-stock  Banks  throughout  all  parts  of  the 
country  beyond  the  limit  above  specified  ;  thereby  virtually  declar- 
ing that  the  existing  private  Banks  were  unworthy  of  credit.  The 
term  '  unfortunately  '  is  used  ;  for,  perhaps,  there  never  was  a  meas- 
ure more  uncalled  for  by  the  wants  of  the  community.  The  existing 
system  was  intimately  connected  with  the  prosperity  of  the  coun- 
try, and  was  good  in  all  parts,  except  the  power  of  issuing  paper 
money  ad  libitum.  The  change  in  question  laid  the  foundation  of 
a  new  system,  to  be  broiaght  into  the  field  by  competition  in  the 
issue  of  paper  money,  —  the  most  prejudicial  means  that  could  be 
devised.  A  reluctant  concession  was  obtained  from  the  Bank  ; 
and,  in  order  to  place  the  whole  subject  before  the  public,  the  cor- 
respondence which  then  took  place  between  the  government  and 
Banks  is  annexed  to  tlie  present  statement.  Very  little  progress 
was  made  in  the  formation  of  those  projected  institutions  prior  to 
the  year  1830,  when  a  further  ap])lication  was  made  by  government 
to  the  Bank  for  concessions  intended  to  have  formed  part  of  the  con- 
ditions at  that  time  for  the  renewal  of  the  charter.  The  opinion 
of  the  Bank  remained  unchanged  as  to  the  danger  to  be  appre- 
hended from  the  extension  of  the  system  of  joint-stock  Banks,  and 
this  opinion  was  pressed  u])on  the  government  at  that  period.  .  .  . 
"  Having  thus  briefly  stated  the  proceedings  which  have  occurred 
in  the  establishment  of  joint-stock  Banks  prior  to  the  renewal  of 
the  charter  of  the  Bank  of  England,  it  may,  perhaps,  be  proper  to 
state  the  periods  of  increase  of  those  of  issue  from  the  year 
1826.  They  are  as  follows,  taken  from  returns  furnished  by  the 
Stamp  Oflice  :  — 

IN    ENGLAND   AND  WALES. 

1826  were  established 3 

1827  „             „              4 

1828  „             „              nil 

1829  „            „              7 

1830  „            , 1 

1831  „             , 8 

1832  „             , 7 

1833  „            , 10 

1834  ,.            , 11 

1835  „             , 9 

1836,  from  1st  January  to  2Gth  November _42 

Total 102 


IN    IRELAND. 

There  were  formed  prior  to  1834 3 

In  1835 2 

In  1836 8^ 

Total 13 


MANAGEMENT   OF   THE   BANK.  263 

"  Until  the  year  1833,  the  action  of  the  Banks,  as  already  stated, 
appears  to  have  been  perfectly  regular.  From  that  point,  the 
increase  in  the  number  of  joint-stock  Banks  in  England  and  Wales, 
to  the  26th  November  last  has  been  seventy-two,  and  in  Ireland 
ten  ;  making  an  aggregate  of  eighty-two,  exclusive  of  their  innu- 
merable branches,  formed  in  almost  every  town  in  the  two  king- 
doms, which  are,  in  fact,  equivalent  to  so  many  additional  Banks. 

"  It  next  remains  to  be  shown  what  was  the  amount  of  paper 
money  in  circulation  in  England  and  Wales  and  Ireland,  other 
than  that  issued  by  the  Banks  of  England  and  Ireland.  The 
average  in  England  and  Wales,  on  the  ^Oth  of  March,  1834,  was 
£10,2(30,000  ;  and  in  June,  1836,  £12,200,000.  In  Ireland,  the  aver- 
age in  June,  1834,  was  £1,300,000  ;  and  in  June,  1836,  £2,300,000. 
It  thus  appears  that  there  Avas  a  total  increase  in  this  portion  of  the 
paper  money  of  the  two  kingdoms,  in  1836  over  1834,  of  no  less 
than  £3,000,000,  or  more  than  25  per  cent. 

"  Having  thus  stated  the  action  of  the  different  bodies  through 
which  the  extension  and  contraction  of  the  paper  money  of  Eng- 
land and  Ireland  have  been  effected  from  the  year  1833  to  the 
present  time,  it  may  be  now  expedient  to  show  the  causes  which 
appear  to  have  occasioned  the  reduction  of  the  circulation  of  the 
Bank  of  England.  It  is  the  mt)re  important  to  submit  these  causes 
to  the  notice  of  the  public,  as  they  seem  in  no  degree  to  have 
arisen  from  over-trading,  or  from,  any  undue  speculative  advance 
in  commercial  prices.  Occuirences  of  that  nature  tend  to  produce 
an  unfavorable  foreign  exchange ;  an  evil  only  to  be  remedied  by 
that  contraction  of  the  circulation  which  eventually  restores  prices 
and  currency  to  a  level  with  those  existing  in  foreign  countries. 
If,  thei'efore,  upon  reference  being  made  to  the  state  of  the  foreign 
exchanges  during  the  period  to  which  the  inquiry  relates,  it  be 
found  that  no  material  derangement  existed,  our  attention  is  natu- 
rally directed  to  the  consideration  of  the  other  causes  that  have 
occasioned  the  demand  upon  our  metallic  currency.  In  order  to 
establish  the  position  that  the  commercial  exchanges  were  not 
against  England,  it  may  be  right  to  refer  to  the  increase  or  de- 
crease of  gold  at  the  Bank,  from  which  alone  any  correct  infer- 
ences are  to  be  draAvn  as  to  the  state  of  our  currency  in  comparison 
with  that  of  foreign  countries. 

"  The  first  period  may  be  taken  from  October,  1833,  to  April, 
1835,  durins:  almost  the  whole  of  which  time  there  was  a  continued 
purchase  of  gold  by  the  Bank  at  £3  17s.  9d.  per  ounce.  The  ex- 
change on  Paris  never  fell  below  25.35  for  short  paper,  and  the 
premium  upon  gold  remained  in  Paris  at  about  9  per  raille :  thus 
sliowing  that,  during  that  period,  there  was  no  demand  upon  the 
Bank  for  bar  gold,  and  no  profit  upon  the  export  of  that  metal  or 
the  gold  coin  of  the  realm. 

"  The  second  period  was  from  April,  1835,  to  April,  1836  ;  during 
the  whole  of  which  time  the  foreign  exchanges  were  considei-ably 
higher  than  during  the  preceding  eighteen  months,  and,  conse- 
quently, the  influx  of  gold  correspondingly  increased  at  the  Bank. 

"  The  third  and  last  period  is  that  from  April  to  December  of  the 


264  HISTORY   OF  MONETARY   THEORIES. 

past  year,  during  the  whole  of  which  time  the  foreign  exchange  on 
Paris  was  seldom  under  25.35.  The  premium  upon  gold,  however, 
was  for  a  short  time  as  high  as  13  or  14  per  mille,  which  occasioned 
a  loss  of  about  £100,000  of  the  Bank's  stock  of  gold  bullion,  — an 
amount  too  trifling  to  establish  the  fact  of  an  unfavorable  com- 
mercial rate  of  exchange. 

"  With  this  statement  of  the  actual  bearing  of  the  foreign  ex- 
changes upon  the  gold  currency  of  the  country,  it  may,  perhaps, 
excite  some  surprise  as  to  the  mode  in  which  the  large  reduction 
in  the  bullion  held  by  the  Bank  was  effected,  and  which,  in  its 
consequences,  from  that  body  having  been  governed  by  the  prin- 
ciple laid  down  in  the  evidence  of  1832,  ought  to  have  had  the 
same  effect  upon  the  general  currency  of  the  empire,  as  if  the 
reduction  had  been  occasioned  by  any  cause  other  than  that  from 
which  it  is  believed  to  have  arisen.  .  .  . 

"  According  to  the  principles  laid  down  in  the  evidence  referred 
to,  the  rate  of  interest  ought  to  have  been  advanced  by  the  Bank, 
in  order  to  throw  back  that  excess  upon  the  market.  It  is  admitted, 
however,  that  we  have  not  been  placed  in  ordinary  circumstances 
since  the  discredit  which  occurred  in  Ireland.  In  consequence  of 
that  event,  there  was,  in  the  first  instance,  an  undue  return  of 
Bank  of  England  notes  for  coin  ;  and  secondly,  it  is  believed,  that, 
in  this  country,  from  a])prehension  of  consequences,  a  much  larger 
amount  of  bank-notes  has  been,  and  still  is,  retained  in  reserve  by 
bankers  generally,  than  they  are  ordinarily  in  the  habit  of  holding. 
At  any  rate,  it  is  evident  that  the  additional  issue  by  the  Bank  has 
not  caused  any  foreign  demand  for  gold  ;  and,  unless  that  be 
exhibited,  the  Bank  ought  not,  under  circumstances  of  an  unnat- 
ural pressure,  strictly  to  enforce  the  principle  laid  down.  .  .  . 

"  We  must  keep  in  mind  that  England  is  the  centre  of  the 
whole  commerce  of  Europe  and  America,  if  not  the  world ;  and 
any  hasty  or  unnecessary  step  taken  will  not  only  affect  the  credit 
and  prices  of  this  country,  but,  to  a  certain  degree,  those  of  all 
parts  of  the  Continent,  from  whence  we  are  to  obtain  that  bullion 
which  we  have  lost.  .  .  . 

"  Allusion  has  already  been  made  to  the  effect  upon  the  currency 
from  a  deranged  state  of  commercial  prices  between  this  and 
foreign  countries.  It  must  be  evident  to  every  one  reflecting  upon 
the  subject,  that  similar  effects  may  be  produced  by  employing 
capital  in  speculative  loans  to  foreign  powers,  or  investing  it 
abroad  at  a  highei-  rate  of  interest  than  the  securities  of  this  coun- 
try may  afford.  This,  it  is  obvious,  may  occasion  large  and  sud- 
den foreign  payments,  without  any  reference  to  the  exchanges. 
And  it  is  to  payments  of  that  character  that  we  may  attribute  the 
loss  of  bullion  which  took  place  from  October,  1833,  to  April,  1835  ; 
and  to  which  the  public  attention  should  be  directed,  that  reme- 
dies may  be  devised  for  mitigating  the  evil  which  must  otherwise 
attend  similar  transactions  hereafter.  ... 

"  Adverting  to  the  excess  of  the  country  issues,  and  looking  to 
the  race  running  with  increased  violence  in  Ireland  as  well  as  in 
England,  the  Bank  was  fully  justified  in  attempting  to  arrest  the 


MANAGEMENT   OF   THE  BANK.    •  265 

evil  which  might  attend  a  continuance  of  the  export  of  bullion 
from  the  redunflancy  of  money,  by  making  an  advance  in  the  rate 
of  interest  in  London  and  at  the  branch  Banks.  In  fact,  the  only 
question  about  which  there  can  be  any  real  difficulty  is,  whotlier 
she  ouglit  not  to  have  taken  this  step  somewhat  earlier.  To  have 
acted,  however,  in  anticipation  of  events  likely  to  occur,  would 
have  been  in  direct  violation  of  that  principle  upon  which  the 
Bank  professed  to  be  guided,  and  which  Parliament  had  tacitly 
sanctioned.  It  would,  moreover,  have  established  a  precedent,  and 
imposed  future  responsibilities  upon  the  directors,  which  it  is  ques- 
tionable whether  they  should  ever  incur,  either  upon  their  own 
account  or  that  of  the  public.  The  Bank  acted  pi*ecisely  as  any 
board  of  commissioners  empowered  solely  to  issue  notes  for  bullion 
would  have  done,  and  can  in  no  way  be  chargeable  with  the  conse- 
quences. .  .  • 

"The  demand  for  bullion  continuing,  the  Bank  further  advanced 
the  rate  of  interest  in  August  to  £5  per  cent  per  annum,  which 
forced  additional  securities  upon  many  of  those  country  Banks 
that  adhered  to  a  lower  rate.  Their  surplus  funds  in  London 
being  soon  absorbed,  they  all  eventually  adopted  the  rate  of  inter- 
est established  in  London.  There  was,  however,  an  effect  created 
by  this  act  on  the  part  of  the  Bank  far  more  powerful  than  the 
actual  advance  in  the  value  of  money.  It  was  a  moral  apprehen- 
sion, in  all  prudent  minds,  that  there  was  mischief  abroad ;  and 
those  who  had  been  promoting  and  applauding  the  action  of  the 
joint-stock  Banks  began  to  doubt  the  solidity  of  the  system.  The 
feeling  so  created  was  probably  further  extended  by  the  publica- 
tion of  the  evidence  already  alluded  to.  The  consequence  of  this 
altered  state  of  confidence  was  first  shown  in  Ireland,  where  the 
competition  had  assumed  a  more  violent  character  than  in  England. 
A  run  upon  all  the  joint-stock  Banks  in  that  part  of  the  empire 
ensued,  which  terminated  in  the  stoppage  of  the  Agricultural. 
The  direct  effect  of  that  discredit  upon  the  Irish  Banks  was  an 
immediate  drain  upon  the  Bank  of  England  and  its  branches  of 
nearly  one  million  of  sovereigns,  obtained  by  the  return  of  notes 
to  that  amount.  None  of  these  Banks  having  been  previously  pro- 
vided with  coin,  or  the  direct  means  of  obtaining  it,  the  only  mode 
of  getting  possession  of  it  was  by  forced  sales  of  securities  in  Lon- 
don. A  moment's  reflection  will  show  the  derangement  in  the 
London  circulation,  necessarily  consequent  on  such  proceedings,  as 
well  as  the  difficulty  under  which  the  Bank  is  placed  by  the  total 
amount  of  coin  or  bank-notes  on  the  part  of  issuing  Banks  to  up- 
hold the  credit  of  their  circulation.  It  may  be  assumed  as  a  fact, 
that  profit  is  their  only  object,  and  that  not  a  single  issuing  Bank 
in  England,  Ireland,  or  even  Scotland,  has  ever  been  provided  with 
bank-notes  or  coin  adequate  to  meet  a  demand  upon  their  respec- 
tive liabilities.  Their  assets,  beyond  the  ordinary  wants  of  their 
customers  are  all  vested  in  securities  bearing  interest;  trusting  to 
the  realization  of  those  securities  in  bank-notes  in  case  of  need, 
which,  thus  abstracted  from  the  public  market,  either  inflicts  a 
most  inconvenient  pressure  ui:>on  Loudon,  or,  in  order  to  prevent 


266  HISTORY   OF  MONETARY  THEORIES. 

that  pressure,  the  Bank  is  required  to  reissue  the  amount  of  notea 
so  cancelled,  without  reference  to  the  amount  of  bullion  in  its  pos- 
session. ... 

"  Under  the  system  which  now  exists,  embracing  a  total  amount 
of  bank-paper  circulation  in  Great  Britain  and  Ireland  of  about 
forty-five  millions,  the  half  of  which  may  be  assumed  to  be  unpro- 
tected by  an  adequate  reserve  of  either  Bank  of  England  notes  or 
coin,  it  certainly  is  impossible  to  insure  the  convertibility  of  paper 
even  for  foreign  payments.  Nothing  can  guard  against  the  effects 
of  mismanagement,  and  consequent  excess,  by  such  a  numerous  mass 
of  issuing  bodies  as  overspread  the  empire.  If,  however,  the 
amount  of  paper  money  be  limited,  and  it  be  issued  by  one  body, 
with  an  adequate  reserve  of  bullion,  expanding  and  contracting  as 
the  currency  may  fluctuate  in  value  with  reference  to  foreign  coun- 
tries, there  could  be  no  difiiculty  in  preserving  it  against  depreciation 
for  all  purposes  of  foreign  payment.  If  paper  money  ever  become 
discredited  by  any  internal  political  convulsion,  it  can  then  only  be 
upheld  by  the  power  of  government ;  and  in  such  times  it  becomes 
the  duty  of  the  ministers  of  the  Crown  to  undertake  the  responsi- 
bility of  upholiling  public  credit.  For  relief  against  commercial 
discredit,  the  issuing  body  should  be  so  formed  as  to  be  able  to 
afford  protection. 

"  With  reference  to  the  past  action  of  the  Bank,  there  is  no  reason 
to  doubt  that  the  value  of  the  currency  would  have  been  maintained 
without  occasioning  any  severe  pressure  upon  the  money  market, 
had  the  countervailing  issues  by  other  parties  not  occurred  :  still, 
if  there  exist  any  well-founded  reasons  for  supposing  that  the  prin- 
ciple explained  in  the  evidence  of  1832,  and  acted  upon  by  the 
Bank,  is  not  sound,  or  that  the  ])roportion  of  one-third  of  bullion 
with  reference  to  the  liabilities  of  the  Bank  at  the  period  of  a  full 
currency  be  not  sufficient,  —  it  merely  remains  for  Parliament  to 
express  an  opinion  upon  either  of  these  points,  and  there  can  be 
no  question  but  that  the  Bank  will  immediately  regulate  its  course 
accordingly.  The  principle  referred  to  was  never  intended  to  apply 
under  any  extraordinary  events  that  might  arise.  In  such  times, 
it  would  become  the  duty  of  the  Bank  to  reduce  their  securities 
without  delay,  and  thus  to  increase  the  relative  proportion  of  bullion 
to  their  liabilities,  prior  to  the  commencement  of  a  foreign  demand, 
which,  in  such  altered  state  of  circumstances,  might  be  expected 
to  occur. 

"  Having  thus  endeavored  to  show  the  rise  and  progress  of  the 
contraction  in  the  circulation  of  the  Bank  of  England,  which  has 
terminated  in  the  pressure  upon  the  money  market,  it  remains  to 
be  considered,  what  are  the  consequences  likely  hereafter  to  ensue 
from  a  continuance  of  the  present  system.  .  .  . 

"  The  consideration  of  the  joint-stock  system  had  been,  for  some 
time  prior  to  the  year  1825,  forced  upon  public  attention  by  the 
many  failures  which  had  taken  place,  subsequently  to  1810,  in  pri- 
vate banking-establishments,  amounting  to  more  than  one  hundred 
and  fifty;  and,  as  about  eighty  private  banks  suspended  their  pay- 
ments in   1825,  the  government  thought  themselves  then  called 


MANAGEMENT   OF   THE  BANK.  267 

upon,  without  further  delay,  to  endeavor  to  change  the  system  alto- 
gether,—  a  sound  system  of  banking  being  an  object  of  the  highest 
importance  to  the  Avhole  community.  The  view  taken  by  govern- 
ment was  strengthened  by  observing  the  little  comijarative  de- 
rangement sustained  by  Scotland  under  the  joint-stock  Banks,  by 
which  the  monetary  concerns  of  that  part  of  the  kingdom  have 
been  almost  exclusively  conducted.  Looking  to  that  country  as  an 
example,  it  was  perhaps  natural  to  conclude  that  what  aftbrded  evi- 
dence of  advantage  in  one  part  of  the  kingdom  would  be  equally 
good  for  all  the  rest.  There  is  no  intention  to  criticise  the  Scot- 
tish system  of  banking;  but,  were  it  narrowly  examined,  it  might 
not  appear  so  perfect  in  all  its  parts  as  its  many  warm  advocates 
are  inclined  to  believe.  Suffice  it  to  say,  that  it  has  produced  great 
benefit  to  Scotland,  which  is  a  sufficient  reason  for  leaving  it  un- 
touched so  long  as  it  commands  public  confidence.  .  .  .  The  two 
systems  were  different  in  origin  and  principle.  That  of  England 
had  been  formed  upon  the  Bank  of  England,  and  private  establish- 
ments precluded  by  Parliament  from  embracing  more  than  six 
partners,  while  the  system  of  joint-stock  Banks  had  ever  been  the 
main  support  of  the  circulation  of  Scotland.  Both  systems  existed 
with  equal  advantage  in  the  several  districts  where  established. 
A  change  in  either  could  only  be  accomplished  by  competition,  en- 
dangering the  credit  and  currency  of  the  country.  ...  So  danger- 
ous does  this  system  appear,  as  it  now  stands,  that  it  becomes 
questionable  whether  the  Bank  of  England  and  the  bodies  in  ques- 
tion can  permanently  exist  together."  ^ 

Such  was  the  attempted  explanation  of  the  abandonment  or 
failure  of  the  rule  requiring  the  Bank,  on  a  full  currency,  to 
maintain  reserves  in  coin  equalling  one-third  of  its  liabilities. 
In  adopting  it,  it  merely  followed  the  dogma  of  the  Bullion 
Committee,  that  the  condition  of  the  currency  was  indicated 
by  that  of  foreign  exchange.  If  the  latter  were  at  par,  the 
currency  was  necessarily  in  a  healthy  and  normal  condition. 
The  Bullion  Committee  did  not  attempt  to  prescribe  the  requi- 
site amount  of  coin  to  be  held,  when  the  exchanges  were  at 
par,  and  the  currency  consequently  full.  The  managers  of  the 
Bank  adopted  the  "  one-third  rule  "  for  no  other  reason  than  that, 
for  some  time  after  it  recovered  from  the  effects  of  the  panic  of 
1826,  it  held  specie  equalling  about  one-third  its  liabilities  ; 
the  former  averaging,  from  1827  to  1830,  inclusive,  about 
£10,000,000  ;  the  latter,  about  £30,000,000.  As  the  propor- 
tion was  purely  accidental,  the  rule  was  equally  accidental. 
The  exchanges  being  at  par,  the  currency  was  full,  and  in  a 

1  Causes  and  Consequences  of  the  Pressure  in  the  Money  Market. 


268  HISTORY   OF   MONETARY  THEORIES. 

healthy  and  normal  condition.     An  adverse  exchange  caused 
contraction,  which  was  still  to  disturb  only  temporarily  the 
relation  between  liabilities  and  reserves,  as  the  rate  of  inter- 
est would  be  raised  to  such  a  pitch  that  the  coin  lost  would 
flow  back  into  the  country,  and  into  the  Bank,  from  being 
more  valuable  there  than  elsewhere.     This  doctrine  was  im- 
plicitly adopted   by  the  Bank,  and   appeared  to  work  satis- 
factorily in  the  drain  which  began  in  1830,  and  continued  until 
1832,  although  the  proportion  of  one-third  between  reserves 
and  liabilities  was  by  no  means  maintained.     The  drain  con- 
tinued so  long  as  it  was  profitable  to  export  gold,  or  so  long 
as  the  country  had  no  means  of  discharging  its  liabilities  but 
by  export.     It  turned,  when  it  became  profitable  to  import  it, 
or  when  England  became  the  creditor  instead  of  the  debtor 
nation.     During  these  automatic  movements,  as  they  may  be 
called,  every  thing  worked  pretty  smoothly.    In  the  mean  time, 
the  Bank  conducted  its  operations  as  if  the  currency  had  been 
full,  and  had  the  satisfaction  of  seeing  its  gold  brought  back 
to  it  in  full  volume,  without  raising  a  finger  on  its  part.     The 
correctness  of  the  dogma  of  the  Bullion  Committee  seemed  to 
be  established  beyond  cavil.     From  1833  to  1837,  however, 
the  exchanges  remaining  at  par,  the  Bank  was  subjected  to  a 
steady  drain  for  coin,  which  took  from  it,  in  a  period  of  three 
and  a  half  years,  nearly   £7,000,000.     The  rule  no  longer 
worked  ;  or,  rather,  the  Bank  no  longer  followed  the  rule.     It 
no  longer  applied,  for  the  reason  that  the  demand  for  coin  was 
domestic,  not  foreign.     This  demand,  to  use  the  language  of 
Mr.  Palmer,  "  seems  in  no  degree  to  have  arisen  from  over- 
trading,  or   any   undue    speculative   advance   in   commercial 
prices:  occurrences  of  that  nature  tend  to  produce  an  unfa- 
vorable foreign  exchange, — an  evil  only  to  be  remedied  by 
that  contraction  of  the  circulation  which  eventually  restores 
prices  and  currency  to  a  level  with  those  existing  in  foreign 
countries."    With  conditions  not  contemplated  by  the  Bullion 
Committee,  the  Bank  was  no  longer  to  be  governed  by  the 
rules  it  had  laid  down.    It  must  meet  a  domestic  demand  both 
for  currency  and  coin  ;  otherwise  there  would  be  a  domestic 
convulsion  or  disturbance  most  fatal  in  its  effects.     "  It  is  evi- 
dent," said  Mr.  Palmer,  "  that  the  additional  issue  by  the  Bank 
has  not  caused  any  foreign  demand  for  gold  ;  and,  unless  that 
be  exhibited,  the  Bank  ought  not,  under  circumstances  of  un- 


MANAGEMENT   OF   THE   BANK.  269 

natural  pressure,  strictly  to  enforce  the  principle  laid  down. 
We  must  keep  in  mind  that  England  is  the  centre  of  the  whole 
commerce  of  Europe  and  America,  if  not  of  the  world  ;  and 
any  hasty  or  unnecessary  step  taken  will  not  only  affect  the 
credit  and  prices  of  this  country,  but,  to  a  certain  degree,  those 
of  all  parts  of  the  Continent  from  whence  we  are  to  obtain 
that  bullion  which  we  have  lost.  .  .  .  And,  in  order  to  prevent 
that  pressure,  the  Bank  is  required  to  reissue  the  amount  of 
notes  so  cancelled"  (taken  in),  "without  reference  to  the 
amount  of  bullion  in  its  possession."  While  no  longer  recog- 
nizing the  old  rule  under  the  new  condition  of  things,  Mr. 
Palmer  seems  measurably  to  have  lost  confidence  in  its  value 
in  reference  to  the  exchanges.  "  It  remains  for  Parliament," 
he  says,  "  to  express  an  opinion  upon  either  of  those  points  " 
(that  is,  whether  the  rule  should  hold  in  reference  to  the  cur- 
rency when  exchanges  are  even,  or  whether  it  should  be 
abandoned  when  they  are  even,  but  when  the  demand  for  coin 
is  a  domestic  one)  ;  "  and  there  can  be  no  question  but  that 
the  Bank  will  immediately  regulate  its  course  accordingly. 
...  If,  however,  the  amount  of  paper  money  be  limited,  and 
it  be  issued  by  one  body  with  an  adequate  reserve  of  bullion, 
expanding  and  contracting  as  the  currency  may  fluctuate  in 
value  with  reference  to  foreign  exchanges,  there  could  be  no 
difficulty  in  preserving  it  against  depreciation  for  all  purposes 
of  foreign  payment.  If  paper  money  ever  become  discredited 
by  any  internal  convulsion,  it  can  then  be  only  upheld  by  the 
power  of  the  government ;  and  in  such  cases  it  becomes  the 
duty  of  the  ministers  of  the  Crown  to  undertake  the  responsi- 
bility of  upholding  the  public  credit.  For  relief  against  com- 
mercial discredit,  the  issuing  body  should  be  so  formed  as  to 
be  able  to  afford  protection." 

With  such  incoherency  and  incompetency  on  the  part  of  its 
managers,  no  wonder  that  the  Bank  constantly  found  itself 
involved  in  the  greatest  straits,  and  commerce  and  trade  in 
great  uncertainty,  embarrassment  and  loss.  The  reserves 
held  by  the  Bank  are,  at  all  times,  to  have  reference  as  much 
to  a  domestic  as  to  a  foreign  demand,  —  to  its  own  condition 
as  to  that  of  the  public.  They  are  held  to  make  good  losses, 
however  arising.  That  coin  is  drawn  from  it  in  considerable 
quantities,  and  continuously,  is  evidence  that  large  losses  have 
been  made.     It  is  the  same,  so  far  as  the  volume  of  the  car- 


270  HISTORY   OF  MONETARY  THEORIES. 

rency  is  concerned,  whether  the}^  have  been  made  by  the 
Bank  or  by  its  depositors.  If  the  Bank  make  a  loss  of  a 
million  of  sovereigns,  it  must  reduce  its  issues  in  far  greater 
ratio.  If  its  depositors  make  a  similar  loss,  and  draw  in  con- 
sequence a  corresponding  amount  of  coin,  it  must  reduce  its 
issues  in  the  same  ratio  as  if  the  loss  were  its  own.  The 
capital  on  which  it  bases  the  greater  part  of  its  operations, 
belongs  to  the  public  ;  but,  whether  belonging  to  the  public  or 
itself,  its  loans  must  always  be  in  ratio  to  its  reserves.  As 
already  shown,  the  drain  upon  it  for  specie  does  not  begin  till 
the  goods,  the  payment  of  which  is  to  cause  the  foreign  or 
domestic  demand  for  coin,  have  been  purchased  for  consump- 
tion, and  probably  in  great  part  consumed.  But  for  the  instru- 
ments issued  by  the  Bank,  such  purchases  for  consumption 
would  never  have  been  made.  The  Bank,  when  it  makes  its 
loans,  has  no  means  of  knowing  the  purposes  for  which  their 
proceeds  may  be  applied.  Their  use  in  the  purchase  of  im- 
ported merchandise  may  be  upon  a  full  currency ;  when,  in 
fact,  specie  is  flowing  into  its  vaults.  At  that  very  moment 
it  may  be  pursuing  a  course  which  imperils  its  condition.  To 
make  two  sets  of  rules  in  reference  to  its  reserves  —  one  hav- 
ing reference  to  a  foreign,  and  one  to  a  domestic,  demand  —  is 
to  make  distinctions  where  no  differences  whatever  exist.  To 
assume  the  Bank  to  be  in  a  perfectly  safe  condition  when  it  is  not 
being  called  upon  for  specie,  is  an  absurdity  which  any  tyro 
in  finance  should  be  able  to  detect.  The  step  or  act,  which  is  to 
involve  it  in  future  embarrassment  or  loss,  is  always  taken  in 
a  period  of  apparent  prosperity,  —  in  a  period  of  full  currency, 
and  when  it  is  not  on  its  guard. 

No  such  rule,  however,  as  that  formally  set  forth  by  Mr. 
Palmer  ever  did  exist ;  nor  could  it  exist,  considering  the 
manner  in  which  the  Bank  is  organized  and  conducts  its  opera- 
tions. It  can  make  no  rule  which  shall  control  the  operations 
of  its  depositors.  They  will  draw  the  coin  which  belongs  to 
them  as  it  suits  their  necessities.  It  might  as  well  make  a  rule 
that  the  exports  of  the  United  Kingdom  shall  not  exceed  a 
certain  tonnage  and  value.  In  a  panic,  its  gold  as  well  as  its 
rules  are  scattered  to  the  winds.  No  more  meaning  was  at- 
tached to  the  phrase  "  full  currency  "  than  to  "  rapidity  of 
circulation."     A  paper  currency  can  be  said  to  be  full,  only 


IVIANAGEMENT   OF   THE   BA^^K.  271 

•when  all  articles  entering  into  consumption  are  symbolized. 
"  Full  currency  "  was  borrowed  from  the  Bullion  Committee. 
It  meant  with  them  the  equilibrium  of  the  currency.  If  it 
were  more  than  full,  if  it  were  redundant,  then  the  rates  of 
exchange  rose,  to  be  brought  down  again  only  by  a  reduction 
of  the  excess,  —  by  export  of  coin,  which  was  the  only  part  of 
the  currency  that  could  be  exported.  The  reason  that  gold 
goes  forward  is  not  because  the  proper  equilibrium  in  the  circu- 
lating medium  common  to  all  commercial  countries  has  been  dis- 
turbed, but  for  the  reason  that,  from  an  excess  of  instruments 
of  expenditure,  the  country  in  which  such  excess  exists  has 
created  debts  which  can  be  discharged  only  by  an  exportation 
of  coin,  in  default  of  the  ordinary  subjects  of  commerce. 

The  holding,  by  the  Bank,  of  an  amount  of  gold  unusually 
large,  is  always  proof  that  the  currency  is,  or,  rather,  that  pro- 
duction and  trade  are  or  have  been,  in  an  unhealthy  condi- 
tion ;  that  liquidations  to  a  large  extent  have  taken  place ; 
and  that  the  business  public,  in  their  distrust,  or  want  of  op- 
portunities, have  deposited  in  Bank  the  balances  due  them, 
which  have  been  liquidated  in  gold,  for  safe-keeping  and  to 
wait  a  favorable  turn  of  affairs.  A  large  amount  of  gold  in 
its  vaults,  therefore,  indicates  the  exact  opposite  of  what  it  is 
supposed  to  indicate.  With  the  Bank  of  England  it  is  always 
a  prelude  to,  or  always  follows,  great  speculative  movements. 
It  is  the  rule  with  it  to  issue  notes  against  the  coin  it  holds. 
If  the  amount  be  large,  the  issues  act  correspondingly  upon 
prices  and  upon  expenditure.  As  a  necessary  consequence, 
gold  is  drawn  from  the  Bank  to  meet  such  expenditure,  and 
in  the  adjustment  of  balances  that  necessarily  arise.  This 
done,  the  gold  returns  to  it  again,  to  be  made  the  basis  of 
loans  to  be  drawn  from,  and  again  to  be  returned  in  manner 
described.  As  the  viciousness  of  the  system  is  not  seen,  the 
same  inflations  and  contractions  periodically  occur,  alike  dis- 
astrous to  itself  as  to  the  public,  until  their  regular  recurrence 
has  come  to  be  regarded  as  a  necessary  law  or  condition  of 
all  currencies. 

There  can  be  no  doubt  that  the  condition  of  the  country  in 
1836  and  1837  seemed  to  call  for  extraordinary  exertions  on 
the  part  of  the  Bank ;  nor  that,  in  making  them,  it  was  guided 


272  HISTOEY   OF   MONETARY   THEORIES. 

by  the  most  laudable  intentions.     In  November  of  the  former 
year,  the  Northern  and  Central  Bank,  which  had  thirty-nine 
branches,  and  whose  central  office  was  at  Manchester,  finding 
itself  in  trouble,  applied  to  the  Bank  of  England  for  help 
to  the  extent  of  ^500,000.     This,  after  some  hesitation,  was 
granted,  from  fear  of  the  consequences  that  might  follow  the 
failure  of  such  an  extensive  concern.     It  was  soon  found  that 
the  sum  first  applied   for  was   by  no  means  sufiicient,  and 
further  aid  had  to  be  granted,  till  the  whole  amount  reached 
^1,370,000.    This  application  was  quickly  followed  by  one  from 
a  leading  London  house,  which  was  granted  upon  the  guaran- 
tee of  other  houses.     Applications  for  aid  to  other  concerns, 
both  in  London  and  in  the  provinces,  followed ;  which  were 
granted  for  the  same  reason  as  the  preceding.     To  meet  the 
demands  for  such  aid  as  was  regarded  indispensable  to  avert 
a  general  crash,  the  Bank  advanced,  in  a  short  time,  fully 
^6,000,000.     The  final  repayment  of  these  advances,  and  the 
great  relief  they  seemed  to  afford,  might  be  considered  as  a  pre- 
cedent to  be  followed  in  similar  emergencies.    It  must,  however, 
so  long  as  the  Bank  is  conducted  as  at  present,  be  regarded  as  a 
very  questionable  one.     The  Bank  makes  its  loans  by  issuing  its 
own  obligations,  payable  presently,  for  those  of  its  borrowers 
or  of  other  parties,  payable  at  a  future  day.     The  safety  of  the 
transactions  on  its  part  is  in  having  its  obligations  circulate 
as  money,  until  those  upon  which  they  were  based  become  pay- 
able.    In  ratio  as  they  are  returned,  previous  to  the  maturity 
of  the  securities  for  which  they  were  issued,  the  Bank  must  pay 
out   a  corresponding  amount  of  its  own  means.      It  should 
never  attempt  to  loan  its  capital,  or  to  make  loans  that  are 
likely  to  impair  its  amount.     This  is  always  to  be  held  in  re- 
serve to  meet  such  portions  of  its  liabilities  as  are  not  season- 
ably returned  to  it  by  its  securities.     As  its  issues,  however, 
so  far  as  their  credit  is  maintained,  serve  to  it  as  capital,  it  is 
under  the  greatest  temptation,  in  an  active  demand  for  money, 
to  make  an  excessive  use  of  them.     In  case  of  a  temporary 
pressure,  were  its  loans  properly  made,  it  might  act  with  a 
good  degree  of  liberality,  by  increasing  them  to  a  considerable 
amount ;  as  in  such  case  there  would  be  a  reasonable  probability 
that  all  its  issues,  however  made,  would  be  seasonably  returned. 
But  as  itself  is  its  chief  customer,  —  that  is,  as  it  makes  its 
loans  chiefly  in  the  purchase  of  governments,  not,  perhaps,  to 


MANAGEMENT   OF  THE   BANK.  273 

mature  within  the  time  that  its  notes  will  find  their  way  back 
to  it,  —  it  is,  when  subjected  to  a  drain  of  specie,  in  the  dilemma 
of  being  liable  to  have  the  issues  it  may  be  called  upon  to 
make  immediately  presented  for  payment  in  coin,  or  notes,  or  to 
aggravate  the  alarm  and  run  upon  it  by  refusal  to  make  any.  In 
such  a  state  of  things,  to  discount  the  best  paper  may  be  as  fatal, 
in  its  immediate  consequences,  as  to  discount  the  most  worth- 
less. It  can  neither  act  nor  refuse  to  act  with  safety.  It  is 
impossible  for  it  to  liquidate  all  its  obligations  upon  the 
moment,  and  this  is  what  a  panic  calls  upon  it  to  do.  As  it  is, 
it  is  wholly  incompetent  to  manage  or  allay  it.  Its  real  and 
only  safety,  as  well  as  that  of  the  public,  is  in  rendering  panics, 
or  any  considerable  aberration  in  production  and  trade,  im- 
possible, by  making  no  issues  that  will  not  be  taken  care  of  by 
the  borrowers,  —  by  discounting  no  paper  and  taking  no  securi- 
ties that  have  not  a  constituent  in  merchandise. 

The  advances  that  were  made  in  1836-37  seemed  to  have 
accomplished  their  object ;  but,  after  all,  they  only  perhaps 
postponed,  while  they  aggravated,  the  crisis  which  was  already 
inevitable.  In  1839,  after  a  partial  recovery  from  1837, 
the  Bank  was  again  subjected  to  a  drain  far  more  excessive 
than  that  of  the  former  year  ;  a  drain  which  indicated  a  most 
unsound  condition  of  affairs,  —  which  had,  perhaps,  been 
only  skimmed  over,  instead  of  being  healed.  It  was  finally 
driven  to  make  large  loans  at  the  Banks  of  France  and  Ham- 
burg, to  save  it  from  what  seemed  to  be  impending  bankruptcy. 

Mr.  Palmer  was  very  probably  correct  in  ascribing  the 
drain  upon  the  Bank,  or  a  considerable  part  of  it,  to  the  rapid 
formation  and  increased  operations  of  the  joint-stock  Banks. 
It  was  inevitable,  in  the  outset,  that  their  action,  for  the 
want  of  adequate  experience  and  training,  should  have  been 
somewhat  eccentric,  and  should  have  led  to  excessive  expendi- 
tures, not  only  in  consumption,  but  in  enterprises  of  various 
kinds.  As  the  notes  of  the  Bank  were  then  legal  tender,  they 
constituted  the  reserves  of  all  other  issuers.  It  had  thus  to 
stand  in  the  gap,  and  make  good,  from  reserves  held  to  meet 
its  own  liabilities,  the  mistakes  and  losses  of  every  petty  issuer  in 
the  kingdom.  For  all  this,  it  was  by  no  means  prepared.  The 
losses  sustained  by  the  joint-stock  and  other  Banks,  and  from 
over-production  and  over-trading,  proportionably  reduced  its 

18 


274  HISTORY  OF  MONETARY  THEORIES. 

means,  as  well  as  those  of  the  public.  Its  condition  for  a  long 
period  after  1837  was  one  of  great  comparative  weakness,  for 
which  all  the  issuers  of  currency,  including  itself,  were  responsi- 
ble. From  the  passage,  in  1826,  of  the  Act  authorizing  the  for- 
mation of  joint-stock  Banks,  and  especially  from  1833,  previous 
to  which  no  considerable  number  of  these  were  in  operation,  a 
great  revolution  has  been  going  on  in  the  monetary  system  of 
the  kingdom.  Instead  of  holding  reserves  applicable  only  to 
its  own  operations,  it  has  now,  from  the  fact  that  its  notes  are 
leo-al  tender,  to  hold  them  for  those  excee'^ding  in  amount  ten 
times  its  own  ;  and  if  its  managers  do  not  yet  comprehend 
the  principles  upon  which  a  symbolic  currency  must  rest,  they 
make  good  the  lack  by  an  excess  of  caution,  which  now  holds 
out  the  signal  of  alarm  at  the  least  freshening  of  the  breeze 
and  the  slightest  turn  of  the  vane. 

Mr.  Palmer  had  no  sooner  laid  down  his  pen  than  he  was 
instantly  assailed  on  all  sides,  with  no  little  vehemence,  by  a 
crowd  of  writers,  the  most  distinguished  of  whom  was  Mr.  Loyd, 
—  Lord  Overstone  ;  whose  reply  chiefly  deserves  consideration 
from  the  fact,  that  it  prepared  the  way  for  the  Act  of  1844, 
of  which  he  was  the  originator  and  \'irtually  the  author. 

"  The  principle  upon  which  the  Bank  professes  to  be  guided  in 
the  regulation  of  the  currency,"  said  Lord  Overstone,  "  is  this  : 
to  meet  its  outstanding  liabilities,  consisting  of  circulation  and  de- 
posits, it  holds  at  its  disposal  securities  and  specie  ;  and  its  principle 
of  action  is,  to  keep  the  amount  of  its  securities  fixed,  and  to  leave 
any  variation  in  the  amount  of  circulation  and  deposits  to  be 
balanced  by  a  corresponding  variation  in  the  amount  of  specie. 
This  principle  was  set  forth  by  the  Bank  Directors  in  their  evidence 
before  the  ParHamentar}'  Committee,  previous  to  the  last  renewal 
of  the  charter,  and  Avas  recommended  principally  upon  the  ground, 
that  the  effect  of  it  would  be  to  render  the  Bank  a  passive  agent, 
and  that  all  variations  in  the  amount  of  specie  would  thus  become 
the  result,  not  of  any  direct  action  on  the  part  of  the  Bank,  but  solely 
on  that  of  the  public.  If  they  demanded  specie,  it  could  be  obtained 
only  by  paying  in  notes  or  diminishing  deposits  ;  and  if,  on  the 
other  hand,  the  specie  was  increased,  there  must  at  the  same  time 
be  a  corresponding  increase  in  the  amount  of  circulation  or 
deposits.  Under  this  view  of  its  probable  action,  the  principle 
above  stated  m3t  with  a  degree  of  acquiescence  which  a  more  close 
examination  of  the  subject  will  hardly  warrant. 

"  The  Bank,  it  must  be  observed,  acts  in  two  capacities :  as  a 
manager  of  the  circulation,  and  as  a  body  performing  the  ordinary 


0VEP.5T0NE   Oy   THE   MA^AGEMEyT  OF    THE    BAXK.         27o 

functions  of  a  banking  CAncem.  The  duties  of  these  two  characteT«», 
thoucrh  very  often  united  in  the  same  party,  are  in  themselves  j>er- 
fectly  distinct.  In  the  principle  laid  down  by  the  Bank  for  its 
own  guidance,  the  separate  and  distinct  natures  of  these  two 
characters  has  not  been  suflSciently  attended  to.  The  rules  appli- 
cable to  its  conduct  as  mana<;er  of  the  currency  are  mixed  with 
the  rules  applicable  to  its  conduct  as  a  simple  banker,  and  the  rule 
or  principle  under  discussion  is  the  result  of  this  mixture.  As  a 
manager  of  the  currency,  it  is  undoubtedly  a  sound  rule  bv  which 
to  guide  itself,  that  against  the  amount  of  notes  out  it  should  hold 
at  its  disposal  securities  and  sj»ecie  ;  that  the  amount  of  securities 
shall  be  inyariaVjle ;  and  that,  consequently,  all  fluctuations  in  the 
amount  of  notes  out  shall  be  met  by  a  corresponding  fluctuation  in 
the  amount  of  specie  on  deposit ;  and  thus  the  public,  and  not  the 
Bank,  will  be  made  the  regulators  of  the  amount  of  the  circulation ; 
and  that  amount  will,  by  fhis  principle,  be  made  to  fluctuate  pre- 
cisely as  it  would  have  fluctuated  had  the  currency  been  purely 
metallic. 

"  For  the  regulation  of  the  conduct  of  the  Bank  as  a  manager  of 
the  currency,  this  rule  is  perfectly  unobjectionable,  and  rests, 
indeed,  upon  the  soundest  principles. 

'•  But  when  the  same  rule  is  further  applied  to  the  regulation  of 
its  conduct  as  a  banking  concern,  it  is  necessarily  found  to  be 
wholly  impracticable.  It  is  in  the  nature  of  banking  business  that 
the  amount  of  its  deposits  should  vary  with  a  variety  of  circum- 
stances ;  and,  as  its  amount  of  deposit  varies,  the  amount  of 
that  in  which  those  deposits  are  invested  ('yiz.,  the  securities)  must 
vary  also.  It  is,  therefore,  quite  absurd  to  talk  of  the  Bank,  in  its 
character  of  a  banking  concern,  keeping  the  amount  of  its  securi- 
ties invariable.  .  .  . 

"  The  rule  is,  'that,  the  securities  being  kept  equal,  any  diminu- 
tion in  the  amount  of  specie  may  be  met  by  a  corresptonding 
decrease  in  the  aggregate  amount  of  circulation  and  deposits.' 
The  possible  consequence  is,  that  a  large  diminution  of  specie 
may  take  place,  and  be  met,  not  by  a  corresponding  decrease  of 
circulation,  but  solely  by  a  decrease  of  deposits.  Thus,  a  heavy 
drain  upon  the  treasury  of  the  Bank  might  take  place  under  this 
rule,  without  any  contraction  of  the  currency  by  which  that  drain 
is  to  be  checked  or  the  Bank  to  be  protected. 

"To  those  who  are  practically  conversant  with  banking  busi- 
ness, or  who  have  reflected  upon  the  nature  of  it,  it  can  hardly  be 
necessary  to  point  out  the  simple  considerations,  that  b.^nking 
deposits  are  necessarily  variable  in  their  amount  and  duration ; 
and  that,  with  such  variation,  the  amount  of  the  securities  held  by 
the  Bank  will  fluctuate.  It  is,  therefore,  unreasonable  to  talk  of 
the  invariable  amoimt  of  a  bankers  securities  :  and  this  observation 
is  equally  applicable  to  banking  business  when  conducted  by  the 
Bank  of  England  as  when  it  is  conducted  by  any  other  body. 
On  the  other  hand.  I  apprehend  there  will  be  no  difference  of 
opinion,  amongst  those  who  have  reflected  upon  the  principles  of 
paper  currency,  as  to  the  soundness  of  the  rule,  —  that  the  amount 


276  HISTORY  OF  MONETARY   THEORIES. 

of  the  paper  issued  shall  be  represented  by  an  amount  of  securities 
which  never  varies,  and  an  amount  of  specie  M'hich  is  left  to  fluctu- 
ate with  the  fluctuations  of  the  amount  of  notes  out. 

"If  these  rules  be  correct,  it  follows,  that  the  rule  now  adopted 
by  the  Bank  is  incorrect,  and  cannot  be  safely  relied  upon  in 
the  management  of  the  currency.  The  rule  ought  to  be,  that  the 
variations  in  the  amount  of  circulation  shall  correspond  to  the 
variations  in  the  amount  of  bullion  ;  and  the  adherence  of  the  Bank 
to  this  rule  ought  to  be  obvious  on  the  face  of  its  published  ac- 
counts. By  this  means,  and  by  this  means  only,  can  we  obtain  '  a 
paper  circulation  varying  in  amount  exactly  as  the  circulation 
would  have  varied  had  it  been  metallic  ; '  and,  in  addition  to  the 
establishment  of  this  only  sound  principle  of  currency,  shall  we 
obtain  a  simple  and  intelligent  account,  requiring  no  further  ex- 
planation, nor  the  production  of  any  information  not  at  the 
command  of  the  public,  to  enable  them  to  come  to  a  correct  under- 
stanrling  of  it. 

"  Was  the  management  of  the  currency  intnisted  to  a  body 
established  exclusively  for  that  purpose,  this  is  the  rule  by  which 
such  body  must  govern  its  operations.  It  is  only  by  an  adherence 
to  such  a  principle  that  a  paper  currency  can  be  made  to  vary  in 
amount  precisely  as  the  circulation  would  have  varied  had  it  been 
exclusively  metallic.  The  importance  of  a  rigid  adherence  to  this 
rule  cannot  be  over-estimated ;  and,  if  it  be  incompatible,  as  is 
alleged  by  some,  with  the  mixed  functions  of  the  Bank  of  England, 
it  seems  to  become  a  very  serious  question,  whether  it  is  not  better 
to  separate  altogether  the  business  of  banking  from  that  of  regulat- 
ing the  currency,  rather  than  suffer  so  essential  a  rule  to  be  in 
any  degree  compromised.  It  is  not,  however,  very  easy  to  per- 
ceive any  insuperable  difficulty  in  rendering  the  currency  depart- 
ment of  the  Bank  of  England  totally  distinct  and  separate  from 
the  management  of  its  otlier  business  ;  so  that  the  one  should  not 
interfere  with  or  aflect  the  other  more  than  they  would  do  where 
they  were  under  the  control  of  different  bodies.  In  proportion  as 
these  two  functions  are  kept  distinct,  will  each  be  rendered  more 
effectual  for  its  proper  puri)ose.  The  two  branches  of  the  busi- 
ness of  the  Bank,  thus  divided,  will  proceed  with  equal  efficiency, 
and  without  mutual  interruption.  Like  those  animals  described 
by  naturalists,  whose  pecular  property  it  is,  that,  when  cut  into 
two  parts,  they  move  off  in  opposite  directions,  each  half  full  of 
life  and  energy ;  thus,  if  the  two  natures  of  the  Bank  of  England 
were  com])letely  dissociated,  each  would  proceed  to  the  discharge 
of  its  respective  functions  with  more  simplicity  and  efficiency,  un- 
encumbered by  the  conflicting  tendencies  and  opposite  action  of  its 
former  companion.  .  .  . 

"  We  impose  upon  the  Bank  of  England  the  duty  of  regulating 
the  value  of  the  currency,  and  providing  for  the  payment  of  the 
whole  of  it  in  specie,  without  giving  to  that  body  the  exclusive 
power  of  issuing  the  paper  money,  or  investing  it  with  any  direct 
control  over  the  conduct  of  rival  issuers.  We  look  to  the  Bank 
for  a  strict  regulation  of  the  amount  of  its  issues  according  to  the 


OYEESTONE   ON  THE   MANAGEMENT   OF   THE   BANK.        277 

Btate  of  the  exchanges  and  the  drain  for  bullion,  -while,  at  the  same 
time,  we  very  inconsistently  look  to  it,  also,  as  responsible  for  the 
maintenance  of  public  credit  in  a  period  of  pressure. 

"We  thus  unite  in  the  same  body  functions  which,  it  can  be 
easily  shown,  are  in  many  cases  conflicting,  and  thei-efore  incom- 
patible ;  viz.,  those  of  ordinary  banking  business,  and  of  regulating 
the  amount  of  a  paper  currency.  And,  lastly,  to  pei-form  those  very 
delicate  duties,  in  everv  step  of  which  the  personal  interests  of  the 
mercantile,  trading,  and  money  classes  must  be  immediately  affected, 
we  select,  not  a  body  of  individuals,  qualified  (by  their  total  separa- 
tion from  all  such  interests)  to  exercise  a  dispassionate  and  disin- 
terested judgment,  but,  on  the  contrary,  men  the  most  largely 
engaged  in  mercantile  and  moneyed  operations,  and,  therefore,  more 
than  any  other  exposed  in  their  private  interests  to  the  immediate 
effects  of  any  action  upon  the  currency. 

"Again,  with  respect  to  joint-stock  Banks,  we  create  by  law 
large  and  powerful  establishments,  to  which  is  given  the  right  to 
issue  paper  money  without  any  absolute  restriction  ;  and  even  that 
knowledge  of  the  action  of  the  Bank  which  is  essential  to  enable 
them  to  take  a  just  view  of  the  condition  of  the  currency,  and  of 
their  corresponding  duty,  is  afforded  them  only  through  such  im- 
perfect and  delusive  accounts  as  those  published  by  the  Bank  are 
represented  by  the  Bank  Directors  themselves  to  be.  .  .  . 

"  A  Bank  of  issue  is  intrusted  with  the  creation  of  the  circulat- 
ing medium. 

"  A  Bank  of  deposit  and  discount  is  concerned  only  with  the 
use,  distribution,  or  application  of  that  circulating  medium. 

"  The  sole  duty  of  the  former  is  to  take  efficient  means  for  the 
issuing  its  paper  money  upon  good  security,  and  regulating  the 
amount  of  it  by  one  fixed  rule. 

"  The  principal  object  and  business  of  the  latter  is  to  obtain  the 
command  of  as  large  a  proportion  as  possible  of  the  existing  circu- 
lating medium,  and  to  distribute  it  in  such  manner  as  shall  combine 
security  for  repayment  with  the  highest  rate  of  profit. 

"  That  those  two  functions  are  perfectly  separate  and  distinct, 
and  that  there  is  no  connection  between  them  which  renders  it 
necessary  that  they  should  be  administered  by  the  same  parties,  is 
very  clear.  A  very  short  explanation  will  be  sufiicient  to  show 
that  they  are,  in  many  respects,  conflicting  duties. 

"  The  history  of  what  we  are  in  the  habit  of  calling  the  '  state 
of  the  trade '  is  an  instructive  lesson.  We  find  it  a  subject  to 
various  conditions  which  are  periodically  returning;  it  revolves 
apparently  in  an  established  cycle.  First,  we  find  it  in  a  state  of 
quiescence;  next,  improvement,  growing  confidence,  prosperity, 
excitement,  over-trading,  convulsion,  pressure,  stagnation,  distress  ; 
ending  again  in  quiescence. 

"  Now  during  the  progress  of  trade  through  this  circular  course, 
what  is  the  necessary  situation,  and  the  inevitable  conduct  of  the 
banker  ?  The  connection  between  him  and  his  customers  is 
necessarily  very  close  and  intimate  :  they  must  symfiathize  with 
each  others'  views  and  feelings,  and  act,  to  a  considerable  degree,  in 


278  HISTORY   OF    MONETARY  THEORIES. 

concert.  When  confidence  is  increasing,  the  spirit  of  enterprise 
beginning  to  expand  itself ;  when  hope  in  all  its  forms  is  coming 
into  active  operation  ;  when  prices  are  rising,  profits  increasing, 
and  every  merchant  and  tradesman,  with  a  view  of  benefiting  by 
these  circumstances,  is  desirous  of  extending  his  operations,  —  the 
banker  is  looked  to  by  his  customers  to  act  in  concert  with  them  ; 
to  facilitate  tlieir  operations,  and  to  distribute  amongst  them  all  the 
aid  which  the  extent  of  his  resources  enables  him  to  command. 
It  would  be  difficult  to  show  that  it  is  not  his  duty,  properly  undei-- 
stood,  to  obey  this  call,  and  to  assist  the  expanding  energies  of  trade. 
At  all  events,  it  would  be  practically  impossible  for  him  to  act  other- 
wise :  he  must  conform  to  the  tendency  of  circumstances  about 
him ;  he  must  breathe  the  atmosphere  of  opinion  which  surrounds 
him,  and  suffer  himself  to  be  moved  onward  by  the  stream  of 
events  in  which  he  is  placed.  For  the  practical  truth  of  this  view, 
we  may  safely  appeal  to  the  experience  of  all  those  who  are  con- 
cerned with  business  of  this  nature.  A  banker  cannot  contract,  by 
operations  in  a  period  when  the  whole  trading  and  mercantile 
world  are  acting  under  one  common  impetus  of  expansion.  If, 
under  these  circumstances,  the  bankei-,  in  addition  to  what  may  be 
properly  called  his  ordinary  and  legitimate  resources,  is  also  in- 
trusted with  the  power  of  issuing  paper  money  ad  libitum,  is  it  not 
inevitable  that  he  should  abuse  that  power  ?  Can  we  expect,  under 
such  circumstances,  while  all  his  other  resources  are  strained  to  the 
utmost  for  the  accommodation  of  his  customers,  he  will  still  keep  a 
firm  and  unyielding  restraint  over  the  amount  of  his  issues  ?  Will 
he,  under  such  temptations,  in  no  respect  confound  or  compromise  his 
respective  duties  as  a  banker  of  issue  and  a  banker  of  deposit  and 
discount  ?  Or  must  we  not  rather  conclude,  whether  we  look  to  the 
principles  of  human  conduct  or  draw  our  conclusions  from  the  les- 
sons of  experience,  that  he  will  certainly  blend  together  his  deposits 
and  circulation  on  the  one  side,  and  his  gold  and  securities  on  the 
other  ;  and  thus  produce  an  account  which  shall  throw  a  plausible 
appearance  over  the  abusive  use  which  he  is  making  of  his  power 
as  an  issuing  banker?  Look  to  the  published  accounts  of  the 
Bank,  and  to  their  avowed  rule  of  conduct,  — '  Habes  conjitentein 
reunx?  The  effect,  of  course,  of  such  an  application  by  the  banker 
of  his  power  of  issue  will  be  to  give  a  further  stimulus  to  the  exist- 
ing tendencies  of  the  trading  world,  and  ultimately  to  aggravate 
the  convulsion  to  which  they  must  lead,  .  .  . 

"  With  this  view,  it  seems  important  to  direct  the  attention  of 
the  public  to  the  following  points  :  —  i 

"  1.  The  propriety  of  securing  and  strengthening,  and,  if  possible, 
of  extending  the  monopoly,  as  regards  the  currency,  of  the  central 
issuer,  with  a  view  of  rendering  the  indirect  control  which  she 
can  exercise  over  subordinate  issuers  more  powerful  and  effectual. 

"2.  The  propriety  of  making  some  gradual  approach  toward 
the  separation  of  the  banking  functions  from  those  of  the  manage- 
ment of  the  currency,  with  the  view  of  rendering  the  body  that 
undertakes  the  latter  duty  free  from  all  conflicting  interests  and 
motives,  and  at  the  same  time  making  her  responsibilities  distinct 


EMBAEKASSMENT   OF  THE  BAISTI  IN  1839.  279 

and  complete,  and  the  nature  of  her  proceedings  simple  and  easily 
understood. 

"  3.  The  propriety,  in  the  mean  time,  of  a  distinct  separation  in 
the  accounts  of  the  Bank  of  the  management  of  cuiTency  from 
every  other  branch  of  business  ;  of  subjecting  the  superintendence 
of  this  department  to  a  '  separate  committee  of  currency,'  and  of 
associating  with  this  committee  a  representative  of  the  govern- 
ment whose  presence  should  be  always  requisite  to  constitute  this 
committee  efficient  for  business.  ,  .  .  The  presence  of  a  member  of 
the  government  in  all  the  deliberations  of  this  committee  would 
prevent  the  Bank  in  any  tendency  to  abuse  her  power  over  the  cur- 
rency, for  the  promotion  of  her  banking  purposes,  and  the  Bank 
would  exercise  a  similar  restraint  over  the  government."  ^ 

An  examination  of  Lord  Overstone's  reply  to  Mr.  Palmer, 
and  of  the  doctrines  or  propositions  set  forth  in  the  same,  mil 
more  appropriately  follow  the  extracts  which  will  be  given 
from  his  evidence  before  the  Parliamentary  Committee  of  1840. 

The  crisis  past,  a  return  flow  of  specie  set  in.  On  the  31st 
of  August,  1837,  the  Bank  held  £6,548,000  of  specie,  against 
X4,077,000  on  the  28th  of  February  of  that  year.  On  the  28th 
of  February,  1838,  it  held  £10,471,000  of  coin  ;  its  liabilities  at 
that  time  amounting  to  £29,800,000.  On  the  31st  of  August, 
1838,  its  specie  was  reduced  to  £9,540,000  ;  its  liabilities,  to 
£28,410,000.  On  the  28th  of  February,  1839,  its  specie  was 
reduced  to  £6,773,000,  and  its  liabilities  to  £25,837,000.  On 
the  31st  of  August  of  that  year  its  specie  stood  at  £2,420,000  ; 
its  liabilities,  at  £24,471,000.  As  it  appeared  to  be  drifting 
toward  bankruptcy,  it  was  driven  to  the  mortifying  necessity 
of  making  large  loans  in  Paris  and  Hamburg.  In  July,  1839, 
Messrs.  Baring  Brothers  &  Company  made  an  arrangement 
with  twelve  of  the  leading  bankers  of  Paris,  by  which  that 
house  was  to  draw  for  £2,000,000  ;  the  Bank  of  France  under- 
taking to  see  that  the  acceptances  were  paid.  A  similar 
arrangement  was  made  with  the  Bank  of  Hamburg  for 
£900,000.  With  every  bill  drawn,  the  Bank  put  up  with 
trustees,  securities  as  collateral  for  its  payment.  These  loans 
served  not  only  to  increase  largely  the  means  of  the  Bank,  but 
to  allay,  in  a  great  measure,  the  alarm  which  had  prevailed. 
A  return  flow  of  specie  soon  set  in,  increasing  the  amoimt  in 
the  Bank  on  the  28th  of  February,  1840,  to  £4,311,000  ;  its 

1  Eeflections  Suggested  by  a  Perusal  of  the  Pamphlet  of  ^Mr.  J.  Horsley  Palmer. 


280  HISTORY  OF  MONETARY  THEORIES. 

liabilities  at  that  time  standing  at  X  23,060,000.  The  recovery 
of  the  Bank,  however,  was  much  more  gradual  than  from 
previous  panics.  The  amount  of  gold  held  by  it  for  1840, 
averaging  the  amounts  for  February  and  August,  equalled 
only  X4,305,000  ;  and  for  1841,  only  £4,528,000  ;  against 
liabilities  for  £23,282,000  for  the  former  and  £23,575,000  for 
the  latter  year.  In  1842  it  increased  its  coin  to  £7,924,000  ;  and 
on  the  28th  of  February,  1843,  to  £11,016,000,  its  UabiUties 
at  that  time  standing  as  liigh  as  £31,738,000. 

It  is  impossible,  in  a  work  of  the  character  of  the  present, 
to  enter  into  a  full  discussion  of  the  alleged  causes  of  the 
violent  fluctuations  in  the  currency,  and  in  production  and 
trade,  during  the  period  referred  to.  The  real  cause  was  an 
excess  of  paper  money ;  or,  to  state  the  case  more  accurately, 
of  paper  money  that  did  not  sjnnbolize  merchandise,  —  paper 
that  did  not  seasonably  return  to  its  issuers  their  own  liabili- 
ties. As  already  stated,  and  perhaps  more  than  once,  there 
can  be  no  considerable  inflation  or  contraction  where  the  cur- 
rency is  merchandise  or  the  representative  of  merchandise. 
There  may,  in  such  case,  be  much  waste ;  but,  where  equiva- 
lents are  always  present  in  exchanges,  neither  consumption 
nor  credit  can,  to  any  considerable  extent,  anticipate  future 
accumulations.  Large  operations  are  made  upon  credit,  only 
when  the  seller  can  convert  the  paper  he  receives  into  money. 
He  sells  in  order  to  avail  himself  of  the  proceeds.  If  he  can- 
not get  his  bills  discounted,  he  has,  as  a  rule,  no  motive  to  sell. 
He  is  much  stronger  with  his  merchandise  in  hand,  than  with 
the  paper  taken  for  it,  but  which  he  cannot  convert.  He  will 
sell  on  credit,  only  when  he  knows  or  believes  a  Bank  stands 
ready  to  discount  the  paper.  Its  issues  are  to  him  the  equiva- 
lent of  coin  for  whatever  object  he  may  have  in  view.  By 
means  of  Banks,  therefore,  a  very  large  proportion  of  the  mer- 
chandise of  a  community  —  whether  or  not  fitted  for  consump- 
tion —  can  be  turned  into  paper  money  ha\dng,  for  the  time, 
all  the  potency  of  coin.  Accommodation  notes,  to  a  very 
large  amount,  may  in  the  same  way  be  turned  into  money, — 
the  equivalent,  to  the  holders,  of  coin.  If  a  portion  of  the 
bills,  and  not  a  very  considerable  one,  which  h'ave  been 
discounted  be  not  paid  by  their  makers,  the  Banks  must 
take  in  their  notes  and  credits,  by  paying  out  a  corresponding 
amount  from  their  reserves.     So  soon  as  this  is  done,  the  cur- 


OVERSTONE   BEFORE  THE   COM:^^TTEE   OF   1840.  281 

rency  becomes  contracted  in  far  greater  ratio.  Alarm  is  cre- 
ated lest  the  Banks  themselves  should  not  be  able  to  meet 
the  calls  upon  them,  and  a  wild  rush  is  made  for  whatever 
they  hold.  The  alarm  quieted,  all  attempt  to  account  for  the 
fluctuations  and  the  disasters  that  have  been  suffered.  Bad 
crops  are  the  argument  of  one  ;  excessive  importations,  of  an- 
other ;  foreign  loans,  of  a  third  ;  —  the  Bank  laying  the  blame 
upon  the  joint-stock  and  country  Banks  and  bankers,  and  the 
latter  upon  the  former.  But  all  such  explanations  amount  to 
nothing.  A  bad  crop  may  happen,  involving  large  importa- 
tions ;  but,  if  the  currency  be  capital  or  the  representative  of 
capital,  then  its  amount  measures  the  ability  of  the  country  to 
purchase.  So  with  foreign  loans :  if  the  currency  be  capital, 
their  purchase  may  involve  those  who  take  them  in  loss,  but 
can  involve  no  others  ;  nor  can  it  anticipate  the  future  earnings 
of  themselves  or  the  country. 

The  disasters  of  1839  were  well  calculated  to  provoke  the 
attention  of  government ;  and,  as  was  its  wont  on  such  occa- 
sions, the  House  of  Commons,  on  the  10th  of  March,  1840, 
appointed  a  special  Committee,  consisting  of  twenty-six  mem- 
bers, to  "  consider  the  subject  of  Banks  of  issue."  Upon  this 
Committee  was  Mr.  Thomas  F.  Baring  (then  Chancellor  of 
the  Exchequer),  Mr.  Hume,  Sir  Charles  Wood,  Sir  Robert 
Peel,  Mr.  Grote,  with  many  others  almost  equally  distin- 
guished in  financial  and  political  circles.  The  Committee 
passed  in  review  before  them  a  great  number  of  merchants 
and  bankers.  It  is  only  important  to  refer  to  this  evidence  as 
leading  to  the  Act  of  1844,  and  only  to  that  portion  of  it  given  by 
Lord  Overstone  ;  which,  with  the  extracts  already  given  from 
his  essay  published  in  1837,  is  all  that  is  needed  by  way  of  in- 
troduction to  that  Act.  The  great  question  discussed  by  the 
Committee  was  the  difference  or  resemblance  between  the  lia- 
bilities of  a  Bank  in  the  form  of  deposits  and  its  notes  in 
circulation.  Lord  Overstone's'  evidence  was  accepted  as  con- 
clusive of  a  radical  difference  between  the  two.  The  Act 
of  1844  is  simply  an  embodiment  of  his  views.  These  are 
sufficiently  shown  in  his  answers  to  the  questions  put  to  him 
by  the  Committee. 

Question  2661.  "In  yom*  definition  of  the  word  ' circulation ' 
do  you  include  deposits  ?  "  —  "  No,  I  do  not." 

Question   2663.    "  Why  do  you   not   include  deposits  in  your 


282  HISTORY  OF  MONETARY  THEORIES. 

definition  of  circulation  ? "  — "  To  answer  that  question  I  be- 
lieve I  must  be  allowed  to  revert  to  first  principles.  The  pre- 
cious metals  are  distributed  to  the  different  countries  of  the  world 
by  the  operation  of  particular  laws,  which  have  been  investigated, 
and  are  now  well  recognized.  The  laws  allot  to  each  country 
a  certain  portion  of  the  precious  metals,  which,  whilst  other 
things  remain  unchanged,  remains  itself  unchanged.  The  precious 
metals,  converted  into  coin,  constitute  the  money  of  each  country. 
That  coin  circulates  somewhat  in  kind ;  but  in  highly-advanced 
countries  it  is  represented,  to  a  certain  extent,  by  paper  notes 
promising  to  pay  the  coin  to  bearer  on  demand,  —  these  notes 
being  of  such  a  nature,  in  principle,  that  the  increase  of  them  sup- 
plants coin  to  an  equal  amount.  Where  these  notes  are  in  use, 
the  metallic  coin,  together  with  these  notes,  constitutes  the  money 
or  currency  of  that  country.  Now,  this  money  is  marked  by  cer- 
tain distinguishing  characteristics  :  first  of  all,  that  its  amount  is 
determined  by  the  laws  which  apportion  the  precious  metals  to  the 
different  countries  of  the  world ;  secondly,  that  it  is  in  every 
country  the  common  measure  of  the  value  of  all  other  commodities, 
—  the  standard  by  reference  to  which  the  value  of  every  other 
commodity  is  ascertained,  and  every  contract  fulfilled  ;  and,  thirdly, 
it  becomes  the  common  medium  of  exchange  for  the  adjustment  of 
all  transactions,  equally  at  all  times,  between  all  persons,  and  in  all 
places.  It  has,  further,  the  quality  of  discharging  those  func- 
tions in  endless  succession.  Xow,  I  conceive,  that  neither  de- 
posits nor  bills  of  exchange  in  any  way  whatever  possess  those 
qualities.  In  the  first  place,  the  amount  of  them  is  not  determined 
by  the  laws  which  determine  the  amount  of  the  precious  metals  in 
each  country ;  in  the  second  place,  they  will  in  no  respect  serve  as 
a  common  measure  of  value,  or  a  standard  bv  reference  to  which 
we  can  measure  the  relative  values  of  all  other  things  ;  and,  in  the 
next  place,  they  do  not  possess  that  power  of  universal  exchange- 
ability which  belongs  to  the  money  of  the  country.  If  the  Com- 
mittee will  allow  me  to  refer  to  it,  there  is  a  passage  in  the  Report  of 
the  French  Chamber,  which  has  recently  been  appointed  to  inquire 
into  a  subject  very  similar  to  that  which  this  Committee  is  now 
investigating,  which  seems  to  put  the  point  of  the  universal  ex- 
changeability of  money  in  a  very  striking  way  :  — 

" '  If  we  reflect  upon  the  innumerable  commercial  transactions 
which  daily  take  place,  from  those  which  furnish  the  most  incon- 
siderable results  to  those  which  express  the  boldest  speculations 
of  international  commerce,  we  may  readily  perceive  that  they  could 
not  be  accomplished  without  the  assistance  of  an  intermediate  value, 
which  can  successively  be  brought  into  comparison  with  all  others, 
and  serve  among  .them  as  a  standard  and  a  medium  of  exchange.'  " 

Question  2667.  "  What  are  the  elements  which  constitute 
money  in  the  sense  in  which  you  use  the  expression  'quantity 
of  money '  ?  \Vhat  is  the  exact  meaning  you  attach  to  the 
words  '  quantity  of  money,  —  quantity  of  metallic  currency'?  "  — 
"  When  I  use  the  words  '  quantity  of  money,'  I  mean  the  quantity 
of  metallic  coin,  and  of  paper  notes  promising  to  pay  the  coin  on 
demand,  which  are  in  circulation  in  the  country. " 


O^IEESTONE  BEFORE   THE   COlMISnTTEE  OF   1840.  283 

Question  2668.     "  Paper  notes  payable  by  coin  ?  "  —  "  Yes." 

Question  2669.  "  By  whomsoever  issued  ?  "  —  "  Yes." 

Question  2670.  "  By  country  Banks  as  well  as  other  Banks  ? " 

—  »  Yes." 

Question  3101.  "Are  not  the  Bank  of  England  notes,  deposited 
by  you  in  the  Bank  of  England,  as  much  at  your  disposal  as  if  they 
were  in  your  own  banking-house?  "  —  "  Xo." 

Question  3102.  "What  is  the  difference?"  —  "In  the  one  case  I 
am  sure  I  can  have  them  when  I  like,  and  in  the  other  case  I  have 
only  a  general  belief  that  I  can  have  them  when  I  like." 

Question  3106.  "  Are  you  aware  that,  in  the  official  return  of  the 
Bank  of  England,  the  notes  deposited  by  you  appear  as  deposits  ?  " 

—  "Yes." 

Question  3107.  "  Are  you  aware  that  the  notes  that  are  kept  in 
your  own  banking-house  appear,  in  that  official  return,  as  circula- 
tion ?"—"  Yes." 

Question  3108.  "Does  the  circumstance  of  a  certain  amount  of 
bank-notes  belonging  to  you  being  returned  by  the  Bank  of  Eng- 
land, as  deposits,  alter  their  nature  or  change  their  value?"  —  "It 
does." 

Question  3109.  "  Why  ?  "  —  "  Deposit  business  is  a  mode  of  econ- 
omizing the  use  of  the  circulation.  By  means  of  resorting  to  that 
process,  a  greater  amount  of  obligations  or-  of  transactions  can  be 
adjusted  with  a  smaller  amount  of  circulating  medium  than  could 
otherwise  take  place.  The  amount  of  deposits  which  the  Bank  of 
England,  or  any  other  Bank,  holds,  is  worked  by  that  concern  with 
a  certain  reserve  of  bank-notes,  which  reserve  is  measured  in  its 
extent  by  what  that  concern  considers  to  be  the  average  quantity 
of  demand  that  will  be  made  upon  it.  By  that  means,  that  reserve 
is  enabled  to  perform  an  amount  of  business,  which,  without  the 
process  of  banking  deposit  business,  it  would  have  required  an 
amount  of  circulation  equal  to  the  whole  deposits  to  have  per- 
formed. By  that  means,  undoubtedly,  an  economic  use  of  the 
circulation  is  effected;  but  an  economic  use  of  the  circulation  is 
not  itself  circulation.  When  you  put  the  question,  Are  not  the 
bank-notes  in  my  till,  and  the  bank-notes  deposited  by  me  in  the 
hands  of  the  Bank  of  England,  equally  at  my  disposal?  it  is  un- 
doubtedly true  that  they  are ;  but  it  is  true  only  with  respect  to 
the  bank-notes  which  I  have  in  the  Bank  of  England,  upon  the  sup- 
position that  all  other  persons  similarly  circumstanced  with  myself 
do  not  act  simultaneously.  The  Bank  of  England,  or  any  other 
banker,  can  clearly  pay  his  deposits  only  to  the  extent  of  the  bank- 
inof  reserve  in  his  till.  The  banking  reserve  in  his  till  is  the  money 
with  which  that  business  is  worked,  and  constitutes  the  amount  of 
circulation.  It  is  to  mistake  the  amount  of  business  done  for  the 
instrument  with  which  it  is  done,  —  to  call  deposits  circulation. 
Deposits  are  the  business  worked ;  the  reserve  in  the  banking-till 
is  the  instrument  with  which  they  are  Avorked ;  and  the  business 
by  which  your  instrument  is  worked  is  the  circulation  or  money  of 
the  country." 

Question  3121.   "What  difference,  then,  is  there  between  the 


284  HISTOEY   OF   MONETARY  THEORIES. 

bank-note  vou  hold  in  your  hand,  and  the  money  you  deposit  in 
the  Bank?"  —  "The  difference  is  this:  in  one  case,  the  debt  has 
assumed  that  form  which  makes  it  the  representative  of  metallic 
coin  for  all  purposes ;  in  the  other  case,  it  has  not  assumed  a  form 
which  gives  it  those  properties." 

Question  3182.  "Are  there  any  circumstances  you  can  suppose 
which  would  prevent  a  deposit  in  the  Bank  of  England,  belongbg 
to  you,  as  a  banker,  being  applied  to  discharge,  if  you  think  proper 
to  give  an  order  on  the  Bank,  any  debt  to  the  amount  you  may  have 
in  deposit  ?  "  —  "  Yes,  there  are." 

Question  3184.  "Is  there  any  thing,  then,  to  prevent  your  going 
to  the  Bank,  and  receiving  bank-notes  or  sovereigns  for  that  amount, 
and  then  paying  the  notes  or  sovereigns  over  to  that  person  who 
you  suppose  may  refuse  the  check  ?  "  —  "  No." 

Question  3185.  "  Then,  have  not  the  deposits  in  that  case  all  the 
characteristics  of  money  which  the  notes  have?"  —  "No,  they  have 
not." 

Question  3186.  "Have  they  not  discharged  the  debt  that  you 
owed  ?  "  —  "  No :  the  notes  have,  but  not  the  deposit ." 

Question  3187.  "Did  you  not  obtain  notes  to  the  amount  of  the 
deposit  you  had  in  the  Bank ? "  —  "I  obtained  a  discharge  of  my 
credit  in  bank-notes." 

Question  3190.  "Did  you  not  obtain  the  notes  by  means  of  the 
credit?"  — "I  did." 

Question  3196.  "Is  it  your  opinion  that  the  Bank  of  England 
should  increase  or  diminish  its  circulation,  according  to  the  increase 
or  decrease  of  the  influx  of  bullion,  without  regard  to  the  amount  of 
deposits  ?  "  —  "  Certainly." 

Question  3222.  "  Have  you  not  stated  that,  when  the  Baak  wishes 
to  increase  the  quantity  of  currency,  they  will  purchase  securities?" 
—  "I  certainly  think  that  to  purchase  securities,  and  issue  money 
against  that  purchase,  is  the  mode  by  which  the  Bank  should  increase 
the  circulation." 

Question  3226.  "  Is  it  not  your  opinion  that  the  Bank  should  sell 
securities,  to  effect  that  decrease  of  currency  ? "  — "  No  :  I  think 
that  the  proper  course  is  for  the  Bank  to  cancel  their  notes  as  they 
are  paid  in  for  gold." 

The  preceding  extracts  from  the  arguments  of  Mr.  Palmer 
and  Lord  Overstone  fully  present  the  method  of  the  manage- 
ment of  the  Bank  from  its  recovery  from  the  panic  of  1826 
down  to  the  famous  Act  of  1844 ;  while  those  from  that  of  the 
latter,  and  from  his  evidence  before  the  Committee  of  1840, 
fully  set  forth  the  grounds  for  that  Act.  It  turned  wholly  on 
the  distinction  in  kind  between  notes,  and  deposits  growing 
out  of  such  notes.  The  former,  whether  issued  by  the  Bank 
or  by  country  Banks,  were  money';  the  latter,  not.  "  The 
Bank,"  said  Lord  Overstone,  "  acts  in  two  capacities,  —  as  a 


OVERSTONE   ON   THE   ISSUE   OF   THE  CIRCULATION.      285 

manager  of  the  circulation,  and  as  a  body  performing  the  ordi- 
nary functions  of  a  banking  concern.  The  duties  of  these  two 
characters,  though  very  often  united  in  the  same  party,  are  in 
themselves  perfectly  distinct."  The  rule  by  which,  at  the  time, 
the  Bank  claimed  to  be  managed,  was  to  hold  a  certain  quantity 
of  securities,  invariable  in  amount,  and  allow  the  circulation 
over  and  above  such  amount  to  fluctuate  as  gold  was  drawn 
from,  or  was  returned  to  the  Bank.  This  rule,  he  said,  was 
perfectly  correct  when  applied  to  the  Bank  as  issuer  and 
manager  of  the  circulation,  for  the  reason  that  the  latter  was 
uniform,  or  very  nearly  uniform  in  amount ;  but  was  wholly 
inapplicable  to  the  Bank  doing  a  general  banking  business,  as, 
from  their  nature,  its  deposits,  which  were  to  be  paid  in  coin 
equally  with  notes,  fluctuated  constantly  and  excessively  in 
amount.  The  withdrawal  of  such  deposits  in  specie  might 
wholly  exhaust  its  resources,  leaving  its  notes  —  the  circula- 
tion —  entirely  unprovided  for.  The  remedy  was  the  division 
of  the  Bank  into  two  distinct  Departments  ;  one  of  Issue,  the 
other  of  Banking.  The  rule  then  professed  to  be  followed 
would  be  perfectly  correct  as  applied  to  the  circulation.  "  All 
fluctuations  in  its  amount,"  said  Lord  Overstone,  "  would  then 
be  met  by  a  corresponding  fluctuation  in  the  amount  of  specie 
on  deposit :  thus  the  public,  not  the  Bank,  would  be  made  the 
regulators  of  the  amount  of  the  circulation ;  and  that  amount, 
by  this  principle,  would  be  made  to  fluctuate  precisely  as  it 
would  have  done  had  it  been  purely  metallic.  ...  By  this 
means,  and  by  this  means  only,  can  we  obtain  a  paper  circula- 
tion varying  in  amount  exactly  as  it  would  have  had  it  been 
metallic."     To  repeat  his  summary :  — 

"  A  Bank  of  Issue  is  entrusted  with  the  creation  of  the  circulating 
medium. 

"A  Bank  of  Deposit  and  Discount  is  concerned  only  with  the 
use,  distribution,  or  application  of  that  circuUiting  medium.  ^ 

<'  The  sole  duty  of  the  former  is  to  take  efficient  means  for  issuing 
its  paper  upon  good  security,  and  regulating  the  amount  of  it  by 
one  fixed  rule. 

"  The  principal  object  and  business  of  the  latter  is  to  obtain  the 
command  of  as  large  a  proportion  as  possible  of  the  existing  circu- 
lating medium,  and  to  distribute  it  in  such  a  manner  as  shall  com- 
bine security  for  repayment  with  the  highest  rate  of  profit." 

.  The  two  functions  of  issue  and  banking,  being  wholly  dis- 
tinct and  antagonistic,  should  never  be  exercised  by  the  same 


286  HISTORY   OF   MONETARY   THEORIES. 

institution  or  party,  for  the  reason,  that,  if  it  possessed  the 
power,  it  could  never  resist,  in  periods  of  great  monetary  strin- 
gency, the  importunities  of  its  customers  for  an  excessive  issue 
of  notes,  as  means  of  re-enforcing  its  banking  resources.  The 
latter  were  to  arise  wholly  from  notes ;  their  distribution  and 
use,  in  a  manner  to  combine  security  with  the  highest  rate  of 
profit,  being  the  sole  function  of  a  Banking  Establishment  or 
Department.  The  complete  separation  of  issue  and  banking 
was  the  condition  upon  wliich  a  circulation,  always  the  equiva- 
lent in  quantity  and  value  of  coin,  and  consequent  exemption 
from  commercial  and  financial  disasters,  could  alone  be  secured. 
To  accomplish  such  results,  all  future  legislation  in  reference 
to  the  Bank  should  be  directed  :  — 

"  1.  To  the  strengthening,  and,  if  possible,  the  extending,  the 
monopoly,  as  regards  currency,  of  the  central  issuer,  with  a  view 
of  rendering  the  indirect  control  which  it  can  exercise  over  subor- 
dinate issuers  more  powerful  and  effectual. 

"  2.  The  propriety  of  making  some  gradual  approach  toward  the 
separation  of  the  banking  functions  from  the  management  of  the 
currency.  .  .  . 

"3.  Of  subjecting  the  superintendence  of  the  issue  department  to 
a  separate  Committ^ee  of  currency,  and  of  associating  with  this  Com- 
mittee a  representative  of  the  government,  whose  presence  should 
always  be  requisite  to  constitute  this  Committee  efficient  for  busi- 
ness. .  .  ;  The  presence  of  a  member  of  the  government  in  all  the 
deliberations  of  this  Committee  would  prevent  the  Bank  in  any 
tendency  to  abuse  its  power  over  the  currency,  for  the  promotion 
of  her  banking  purposes,  and  the  Bank  would  exercise  a  similar 
restraint  over  the  sovernment." 


o^ 


Here  we  have  foreshadowed,  seven  years  before  its  final 
adoption,  all  the  material  pro%T.sions  of  the  Act  of  1844.  It 
was  simply  an  attempt  to  secure  a  legislative  sanction  for  the 
dogma  of  Adam  Smith,  "  that  the  whole  amount  of  paper 
money  of  every  kind  that  can  easily  circulate  in  any  country 
can  never  exceed  the  value  of  the  gold  and  silver  of  which  it 
supplies  the  place,  or  which  would  circulate  if  there  were  no 
paper  money:  "^  and  to  limit  its  amount  to  that  of  the  coin 
which  otherwise  would  have  been  in  circulation.  The  nature 
of  a  s^Tubolic  currency  wholly  escaped  Lord  Overstone.  It  could 
not  be  otherwise  so  long  as  he  held  to  the  dogma  that  money 
was  not  necessarily  capital,  only  the  wheel  of  commerce,  the 

1  See  ante,  p.  127. 


OVEESTOXE  ON  THE  ISST7E   OF   THE   CIECULATIOX.      287 

value  of  which  bore  no  relation  to  that  which  it  moved.     But, 
if  some  repetition  may  be  allowed,  the  very  object  of  all  paper 
currencies  is  not  to  supplant  a  corresponding  amount  of  coin, 
but  to  supplement  it.     A  far  greater  amount  of  the  latter  may 
be  in  circulation  after  than  before  the  use  of  paper  money,  and 
by  reason  of  such  use.     The  rapid  increase  in  production  and 
trade  in  such  countries  as  Great  Britain  and  the  United  States 
has  arisen  almost  wholly  from  improved  methods  of  distribu- 
tion, among  the  most  valuable  of  which  is  a  symbolic  currency. 
A  reduction  in  the  amount  of  the  latter,  from  whatever  cause, 
would  be  followed  by  a  proportional  reduction  in  the  amount 
of  the  former,  which,  to  a  very  large  extent,  is  the  creation  of 
the  latter.     Paper  and  coin,  instead  of  being  antagonistic,  or 
supplanting  the  one  the  other,  are,  so  far  as  currency  is  con- 
cerned, the  components  or  conditions  of  a  perfect  means  of 
distribution.      Paper   symbolizing   merchandise   is   the   more 
convenient  agent  for  its  distribution  than  coin.     The  latter  is 
more  appropriate  for  the  discharge  of  balances,  and  to  serve  as 
reserves,  which  must  be  maintained  in  ratio  to  the  magnitude 
of  the  transactions  that  are  taking  place.      As  the  value  of 
metallic  money  in  no  way  depends  upon  the  form  it  takes,  — 
pieces  of  the  same  weight  being  equivalents  the  one  of  the 
other,  —  so  the  value  of  paper  money  in  no  way  depends  upon 
the  form  it  takes.     Notes  and  checks  are  the  equivalents  of 
each   other.      Neither   are   in   themselves   capital;    both   are 
equally  the  representatives  of  capital :  both  are  equally  pay- 
able on  demand :  they  are  convertible  into  each  other  at  the 
will  of  the  holder ;  they  act  equally  upon  prices  and  the  rates 
of  exchange.     The   assertion,  therefore,   that   "deposits   are 
business  worked,  and  the  notes  the  instruments  by  which  they 
are  worked,"  has  no  more  meaning  than  an  assertion  ••  that  the 
bullion  in  the  Bank  is  the  business  worked,  its  coin  is  the  in- 
strument by  which  it  is  worked."     There  is  the  same  identity 
in  principle  in  one  case  as  in  the  other.^ 

Lord  Overstone  held  that  the  sole  function  of  the  Banking 
Department  was  to  deal  in  the  notes  of  that  of  Issue.    It  might 

1  Banks  of  deposit,  which  do  not  issue  notes  in  their  ordinarv  form,  are  con- 
stantly issuing  "  certificates  of  deposit,"  which  are  undertakings,  on  their  part, 
to  pay  a  corresponding  amount  of  coin,  which  is  all  that  notes  undertake  to  do. 
So  far  they  are,  in  a  technical  sense,  Banks  of  issue. 


288  HISTORY   OF  MONETARY  THEOEIES. 

deal  wholly  in  such  notes,  and  yet  have  deposits  to  the  amount 
of  millions,  and  not  a  note  remaining  in  its  till,  having  loaned 
them  as  fast  as  received.  Is  there  any  difference  between 
deposits  arising  in  tliis  manner,  and  for  the  discharge  of  wliich 
the  Bank  has  no  other  means  than  its  securities,  and  deposits 
arising  from  the  discount  bills,  their  proceeds  being  placed  to 
the  credit  of  the  borrowers  ?  If  not,  then  the  function  of  th6 
Banking  Department  is  a  much  more  comprehensive  one  than 
Lord  Overstone  would  allow.  But  restricting  it  to  dealing 
solely  with  the  notes  of  the  Issue  Department,  why  should  it 
not  be  allowed  to  repay  obligations  incurred  by  receiving  notes 
on  deposit,  by  notes  of  its  own  creation,  if  the  depositors  prefer 
to  receive  in  tliis  manner  what  may  be  due  them?  The 
nature  of  its  indebtedness  would  not  be  changed  thereby. 
This  would  merely  take  a  different  form.  In  either  case,  it 
would  be  payable  on  demand,  in  coin.  Neither  the  Bank,  its 
creditors,  nor  the  public  could  be  any  worse  off  in  one  case 
than  in  the  other.  Why  not,  then,  let  the  parties  .to  the  trans- 
actions solve  them  in  any  way  they  choose  ?  Whatever  the 
manner,  the  currency  would  not  be  potentially  increased. 

Bank-notes,  not  deposits,  according  to  Lord  Overstone,  con- 
stituted money, circulation,  for  the  reason  that  "their  amount 
is  determined  by  the  laws  wliich  apportion  the  precious  metals 
to  the  different  countries  of  the  world,  and  by  the  fact,  that,  in 
every  country,  they  are  the  common  measure  of  the  value  of  all 
other  commodities,  —  the  standard  by  reference  to  which  the 
value  of  every  other  commodity  is  ascertained,  and  every  con- 
tract fulfilled,  —  the  common  medium  of  exchange  for  the  ad- 
justment of  all  transactions  equally,  at  all  times,  between  all 
persons,  and  in  all  places ;  and  they  have  the  further  quality 
of  discharging  these  functions  in  endless  succession.  Now,  I 
conceive  that  neither  deposits  nor  bills  of  exchange  in  any  way 
whatever  possess  these  attributes."  Deposits,  certainly,  do  not 
possess  such  attributes ;  although  it  might  be  supposed  that 
those  in  the  Bank  of  England  arising  out  of,  and  the  equiva- 
lent of,  its  notes,  might  at  least  possess  qualities  as  exalted  as 
the  notes  issued  by  "  small  tradesmen,  cheese-mongers,  shoe- 
makers, and  butchers,"  so  graphically  described  by  Lord  Liver- 
pool in  1826,  who  had  the  same  right  of  issue  in  1840,  and 
whose  notes,  according  to  Lord  Overstone,  possessed  every- 
where, and  in  endless  succession,  all  the  potency  of  coin. 


THE   GROUNDS   OF  THE  ACT   OF   1844.  289 

It  is  to  be  feared  that  Lord  Overstone  possesses  no  exemp- 
tion from  the  danger  common  to  all  who  undertake  to  give 
reasons.  With  him,  the  notes  of  the  Bank  differed  wholly  from 
deposits,  even  when  the  latter  aroSe  out  of  the  former,  for  the 
reason  that  (as  in  his  answer  to  question  3109)  "  the  amount 
which  the  Bank  of  England,  or  any  other  Bank,  holds,  is  worked 
by  that  concern  with  a  certain  reserve  of  bank-notes,  which 
reserve  is  measured  in  its  extent  by  what  that  concern  con- 
siders to  be  the  average  quantity  of  demand  that  will  be  made 
upon  it.  By  that  means,  that  reserve  is  entitled  to  perform 
an  amount  of  business  which,  without  the  process  of  banking 
deposit  business,  it  would  have  required  an  amount  of  circula- 
tion equal  to  the  whole  deposits  to  have  performed."  That 
the  notes  of  the  Bank,  but  for  the  deposits,  would  have  to  be 
increased  by  the  amount  of  the  latter,  can  hardly  be  held  to 
prove,  beyond  cavil,  a  radical  difference  between  the  two. 
The  inference  from  the  statement,  on  the  other  hand,  would 
seem  to  favor  their  perfect  identity  in  principle.  Lord  Over- 
stone  himself  appears  to  have  entertained  some  misgivings :  for 
in  the  same  paragraph  he  proceeds  to  say,  that  "  deposits  are 
business  worked ;  the  reserve  in  the  banking  till  is  the  instru- 
ment by  which  they  are  worked ;  and  the  business  by  which 
your  instrument  is  worked  is  the  currency  of  the  country  " ! 
The  conclusion  to  which  he  finally  comes,  that  both  forms  of 
paper  are  equally  circulation,  —  money,  —  is  very  satisfactory, 
whatever  may  be  thought  of  the  process  by  which  it  was 
reached,  and  however  unintelligible  it  may  be  to  those  not 
familiar  with  Aristotle,  Adam  Smith,  and  the  Schoolmen.  As 
it  was,  "  his  wit  was  too  courtly  "  for  the  simple  natures  of  the 
Committee  ;  "  and  they  rested."  It  must,  however,  be  remem- 
bered that  question  3109  was  the  457th  that  had  been  asked 
him  consecutively.  By  that  time  he  had  them  in  a  state  of 
mind  as  wild  and  incoherent  as  his  own. 

The  next  extension  of  the  charter  of  the  Bank  was  the  occa- 
sion of  giving  a  legal  sanction  to  Lord  Overstone's  schemes. 
On  the  14th  of  May,  1844,  Sir  Robert  Peel,  then  at  the  head 
of  the  government,  moved  a  resolution  that  it  was  expedient 
to  continue,  for  a  limited  time,  the  privileges  enjoyed  by  the 
Bank  of  England,  subject  to  such  conditions  as  Parliament 

might  think  fit  to  impose  :  — 

19 


290  HISTORY   OF   MONETARY   THEORIES. 

« I  must  state,  at  the  outset,"  lie  said,  in  introducing  the  measure, 
"  that  in  using  the  word  '  money,'  I  mean  to  designate  by  that  word 
the  coin  of  the  realm,  and  promissory  notes  payable  to  bearer  on 
demand.     In  using  the  words  '  paper  currency,'  I  mean  only  such 
promissory  notes.      I  do  not  include  in  these  terms  bills  of  ex- 
chancre,  or  drafts  on  bankers,  or  other  forms  of  paper  credit.     There 
is  a  "natural  distinction,  in  my  opinion,  between  the  character  of 
promissory  notes  payable  to  bearer  on  demand,  and  other  forms  of 
paper  credit,  and  between  the  effects  which  they  respectively  pro- 
duce upon  the  price  of  commodities,  and  upon  the  exchanges.    The 
one  answers  all  the  purposes  of  money,  passes  from  hand  to  hand 
without  indorsement,  without  examination,  if  there  be  no  suspicion 
of  forgery ;  and  it  is,  in  fact,  what  its  designations  imply  it  to  be,  — 
cun-ency,  or  circulating  medium.    ...   I  think  experience  shows 
that  the  paper  currency,  that  is,  the  promissory  notes  payable  to 
bearer  on  demand,  stands  in  a  certain  relation  to  the  gold  coin  and 
the  foreign  exchange,  in  which  other  forms  of  paper  credit  do  not 
stand.      There  are  striking  examples  of  this  adduced  in  the  Report 
of  the  Bullion  Committee  of  1810,  in  the  case  both  of  the  Bank  of 
England  and  of  the  Irish  and  Scotch  Banks.      In  the  case  of  the 
Bank  of  England,  shortly  after  its  establishment  there  was  a  mate- 
rial depreciation  of  pap'er,  in  consequence  of  its  excessive  issue. 
The  notes  of  the  Bank  of  England  were  at  a  discount  of  17  per 
cent.    After  trying  various  expedients,  it  was  at  length  determined 
to  reduce  the  amount  of  bank-notes  outstanding.    The  consequence 
was  an  immediate  increase  in  the  value  of  those  which  remained  in 
circulation,  the  restoration  of  them  to  par,  and   a   corresponding 
improvement  in  the  foreign  exchanges.     In  the  case  of  Ireland,  in 
1804,  the  exchange  with  England  was  extremely  unfavorable.     A 
Committee  was  appointed  to  consider  the  causes.     It  was  denied 
by  most  of  the  witnesses  from  Ireland  that  they  were  at  all  con- 
nected with  excessive  issues  of  Irish  notes.  ...  In  the  spring  of 
1804,  the  exchange  of  Ireland  with  England  was  so  unfavorable  that 
it  required  £118  10s.  of  the  notes  of  the  Bank  of  Ireland  to  purchase 
£100  of  the  notes  of  the   Bank  of  England.     Between  the  years 
1804  and  1806,  the  notes  of  the  Bank  of'lreland  were  reduced  from 
£3,000,000  to  £2,410,000;  and  the  effect  of  this,  taken  in  conjunc- 
tion with  an  increase  of  the  English  circulation,  was  to  restore  the 
relative  value  of  Irish  paper,  and  the  exchange  with  England  to 
pax-.     In  the  same  manner,  an  unfavorable  state  of  the  exchange 
between  England  and  Scotland  has  been  more  than  once  corrected 
by  a  contraction  of  the  paper  circulation  of  Scotland.     In  all  these 
cases,  the  action  has  been  on  that  part  of  the  paper  credit  of  the 
country  which  has  consisted  of  promissory  notes  payable  to  bearer 
on  demand.     There  has  been  no  interference  with  other  forms  of 
paper  credit ;  nor  was  it  contended  then,  as  it  is  now  contended  by 
some,  that  promissory  notes  are  identical  in  their  nature  with  bills 
of  exchange,  and  with  checks  on  bankers,  and  with  deposits,  and 
that  they  cannot  be  dealt  with  on  any  separate  principle." 

To  justify  the  proposed  measure,  Sir  Robert  had  to  go  farther 


THE   GROUNDS   OF   THE  ACT   OF   1844.  291 

than  Lord  Overstone,  and  assert,  not  only  the  distinction  in 
kind  between  notes  and  deposits,  but  that  notes  were  the 
great  cause  of  the  commercial  and  financial  disasters  that  were 
constantly  occurring,  and  were  to  be  subjected  to  a  rigid  re- 
straint ;  while  the  influence  exerted  by  deposits  was  so  wholly 
innocuous  as  to  require  no  legislative  interposition  whatever. 
If,  however,  according  to  Lord  Overstone,  the  notes  of  Banks 
by  their  inherent  qualities  supplanted  an  equal  amount  of  coin, 
—  if  "  they  were  standards  of  value  in  all  transactions,  between 
all  parties,  and  at  all  times,  and  in  endless  succession,"  —  what 
need  of  legislation  in  reference  to  them  that  coin  did  not  re- 
quire ?  Sir  Robert's  refinement  of  Lord  Overstone's  distinc- 
tion is  as  absurd  as  the  distinction  itself.  He  might,  with 
equal  proj)riety,  have  based  his  measure  upon  the  influence 
that  the  color  of  the  notes  of  the  Bank  exerted  upon  the  rates 
of  exchange :  those  printed  upon  paper  of  a  certain  tinge  of 
green  having  a  tendency  to  put  up  the  rates  of  exchange, 
while  those  that  had  a  certain  tinge  of  blue  tended  to  put 
them  down.  His  illustrations,  when  examined,  will  be  seen  to 
have  no  better  foundation  than  his  assumptions.  In  1697,  the 
notes  of  the  Bank  were  at  a  discount ;  for  the  reason  that,  dur- 
ing the  recoinage  of  1696,  it  issued  them  in  considerable  amounts 
in  exchange  for  debased  coin  then  in  circulation.  This  coin 
went  out  of  use,  so  that  all  contracts  entered  into  previous 
thereto  had  to  be  made  good  in  coin  of  standard  value.  The 
Bank  further  embarrassed  itself  by  making  large  loans  to  gov- 
ernment, in  order  to  aid  it  through  the  period  of  the  recoinage. 
It  also  suffered  discredit  in  being  unable  to  get  standard  coin 
in  sufficient  abundance  to  meet  its  wants,  from  the  inability  of 
the  mint  to  turn  it  out.  A  variety  of  causes,  therefore,  operated 
to  depreciate  its  notes ;  among  them,  the  want  of  adequate 
means.  To  provide  such,  it  was  compelled  to  make  two  calls 
of  20  per  cent,  each  upon  its  stockholders.  With  their  pro- 
ceeds it  was  enabled  to  take  in  its  notes  at  par.  No  reduction 
in  their  amount  would  have  increased  the  price  of  those  out- 
standing, unless  it  had  been  attended  by  an  increase  in  value. 
With  Sir  Robert  Peel  the  question  was  one  of  quantity,  not  of 
quality.  He  assumed,  with  the  Bullion  Committee,  that  all 
that  was  necessary  to  raise  the  value  of  depreciated  notes  to 
par  was  to  reduce  their  amount.  The  depreciation  of  the 
notes  of  the  Irish  and  Scotch  Banks  could  only  be  remedied 


292  HISTORY   OF   MONETARY   THEORIES. 

by  increasing  their  value.  They  had,  undoubtedly,  too  many 
notes  out ;  but  no  amount  of  reduction  would  have  brought  up 
their  price,  unless  attended  with  an  increase  of  their  value.  In 
all  the  examples  referred  to,  the  value  of  notes  and  deposits  in 
Bank  was  always  the  same,  as  they  were  always  convertible 
the  one  into  the  other.  The  Banks  could  not  bring  up  the 
price  of  one  without  bringing  up  the  price  of  the  other.  Both 
were  in  excess,  and  both  had  to  be  reduced  as  a  means  of 
bringing  up  the  value  of  either  one  remaining  outstanding. 
Sir  Robert's  illustrations,  therefore,  are  nothing  to  the  pur- 
pose ;  or,  if  they  prove  any  thing,  they  prove  the  exact  opposite 
of  that  sought  to  be  proved. 

Sir  Robert  Peel  enforced  his  argument  as  to  the  necessity  of 
government  taking  the  currency  under  its  control,  so  far  as 
related  to  competition  or  freedom  of  issue,  from  the  experience 
of  banking  in  the  United  States  :  — 

"It  appears  to  me,"  he  said,  "that  the  conclusions  of  reason 
against  unlimited  competition  of  issue  are  amply  confirmed  by  the 
admissions  of  the  advocates  for  it.  Are  the  lessons  of  experience 
at  variance  with  the  conch;sions  we  are  entitled  to  draw  from  rea- 
son and  from  evidence  ?  What  has  been  the  result  of  unlimited 
competition  in  the  United  States?  In  the  United  States,  the  paper 
circulation  was  supplied  not  by  private  bankers,  but  by  joint-stock 
Banks  established  on  principles  apparently  the  most  satisfactory. 
There  Avas  every  precaution  taken  against  insolvency;  unlimited 
responsibility  of  partners ;  excellent  regulations  for  the  publication 
and  audit  of  accounts ;  immediate  convertibility  into  gold.  If  the 
principles  of  unlimited  competition,  controlled  by  such  checks,  be 
safe,  why  has  it  utterly  failed  in  the  United  States  ?  How  can 
it  be  shown  that  the  experiment  was  not  fairly  made  in  that 
country  ?  " 

In  the  debate  which  followed,  he  was  sustained  by  Sir  Charles 
Wood,  now  Lord  Halifax ;  who,  in  reference  to  American  Banks, 
said :  — 

"  We  are  not  without  experience  as  to  the  value  even  of  conver- 
tibility as  a  safeguard  for  the  preservation  of  the  standard.  ...  In 
America,  the  convertibility  of  bank-notes  is  a  fundamental  article 
of  the  Constitution ;  provisions  more  stringent  than  in  this  country 
are  enacted  to  enforce  it  in  practice ;  every  precaution  is  taken  to 
render  the  Banks  safe  and  sound.  They  are  all  joint-stock  Banks, 
with  limited  liability,  and  restrictions  on  issues,  p:iid  up  capital,  and 
whatever  other  precaution  can  be  devised  for  this  purpose.  What 
has  been  the  result  ?  " 


THE   ARGUMENTS   FROM   THE   AMERICAN   SYSTEM.       293 

Mr.  Goiilburn,  then  Chancellor  of  the  Exchequer,  who  took 
part  in  the  debate,  spoke  as  follows  :  — 

"  Was  there  not,  then,  in  the  United  States  a  paper  that  was  per- 
fectly convertible  ?  Was  there  not,  then,  a  precise  regulation  that 
every  note  should  be  payable  on  demand  in  coin?  Still,  in  con- 
sequence of  competition,  there  was  an  excess  of  issues ;  and  this, 
though  there  was  a  perfect  publicity  as  to  accounts,  a  rigid  inspec- 
tion "by  the  government,  and  a  rigorous  control ;  and  yet  from  the 
competition  of  issues  they  reduced  the  country  to  that  state,  that,  as 
the  honorable  gentleman  himself  had  said,  they  overlooked  morality, 
and  suspended  cash  payments.  There  was  no  want,  then,  of  a  con- 
vertibility of  paper  enforced  by  law ;  but  the  competition  of  issues 
defied  all  law,  and  made  every  man  in  the  community  anxious  to 
increase  the  circulation,  in  order  that  he  might  be  able  to  promote 
his  own  wild  speculations." 

Schoolboys  in  England  who  should  repeat  such  stuff  as  this 
should  be  sent  to  the  bottom  of  their  forms.  That  men  at  the 
head  of  a  great  empire  should  fabricate  or  utter  it  exceeds 
belief.  At  that  time  the  United  States,  as  a  nation,  had  no 
more  relation  to  the  Banks  within  it  than  it  had  to  the  Bank 
of  England.  It  was  held,  at  the  time,  to  be  unconstitutional 
for  the  nation  to  establish  Banks,  or,  indeed,  any  corporate 
company  whatever.  The  extension  of  the  charter  of  the 
United  States  Bank,  which  expired  in  1836,  was  refused  on 
this  very  ground.  In  the  twenty-nine  States,  of  which  the 
nation  was  composed,  there  were  as  many  systems.  The  opera- 
tion of  these  might  be  said  to  prove  almost  every  thing  except 
the  assertions  made  in  reference  to  them,  or  to  the  assumed 
one  of  the  United  States.  The  States  of  Arkansas,  Florida, 
and  Mississippi  had  systems  peculiar  to  themselves,  which 
consisted  of  borrowing  large  sums  of  money  for  the  ostensible 
purpose  of  founding  Banks,  squandering  it,  and  winding  up 
by  repudiating  payment.  Their  systems  were  a  full  proof  of 
the  barbarous  and  dishonest  character  of  their  people.  They 
had  neither  capacity  to  manage  Banks,  nor,  in  Mississippi  at 
least,  the  integrity  to  admit  even  a  legal  liability  for  the  money 
borrowed,  which  they  seized  and  made  way  with  as  lavishly 
and  absurdly  as  if  they  had  been  tribes  of  savages.  Sir  Robert 
Peel  and  his  associates  should  have  known  something  about 
the  systems  of  these  States,  as  the  money  to  found  them  hud 
been  in  great  part  borrowed  in  London,  and  the  whole  city 
was  then  ringing  with  denunciations  of  the  defaults  that  had 


294  HISTORY   OF    MONETARY   THEORIES. 

been  made.  The  Banks  nominally  set  on  foot  in  these  States 
were,  according  to  Sir  Robert,  among  those  for  the  publication 
and  audit  of  whose  accounts,  and  for  the  payment  of  whose 
notes  in  coin,  such  wonderful  pro\dsions  had  been  made,  — 
provisions,  unfortunately,  rendered  wholly  inoperative  by  the 
competition  of  the  issuers.  In  some  of  the  Western  States 
there  were  what  were  very  appropriately  termed  "wild-cat" 
systems,  —  no  wilder,  however,  than  that  which  only  a  short 
time  ago  prevailed  in  every  part  of  England.  The  object  of 
such  Banks  in  the  United  States,  and,  indeed,  everywhere 
else,  was,  in  the  first  place,  to  impose  their  notes  upon  the  pub- 
lic, and  then  to  provide  for  their  redemption  as  could  best  be 
done.  If  there  were  no  downright  dishonesty  in  these  sys- 
tems, they  were  entirely  without  any  stable  foundation,  and  in 
the  United  States  they  aU  disappeared  like  a  growth  of  mush- 
rooms. Fortunately,  very  little  money  was  borrowed  to  set 
them  up.  The  principal  sufferers  were  the  note-holders.  Other 
States,  like  that  of  New  York,  ha,d,  in  fact,  two  systems :  one 
in  the  cities,  founded  on  adequate  means  and  well  conducted ; 
the  other  in  districts  far  removed  from  the  sea-board,  in  which 
the  wild-cat  element  largely  prevailed.  This  element,  how- 
ever, in  this  State  as  through  the  country,  steadily  tended  to 
disappear  with  the  increase  of  wealth ;  for  this  always  brings 
with  it  the  lessons  proper  for  its  management,  to  those  by  whom 
it  is  acquired,  whether  it  be  a  Bank,  or  some  industrial  enter- 
prise, in  which  it  may  be  invested.  The  systems  of  Pennsyl- 
vania, and  of  the  States  lying  to  the  South,  repeated  in  their 
double  character  that  of  New  York ;  some  parts  of  them  very 
good,  some  very  \icious.  Legislation  could  do  little  in  those 
States,  nor  can  it  anywhere,  unless  seconded  by  integrity  and 
business  training.  That  which  is  to  render  a  system  perfect 
far  transcends  legislative  skill  or  power.  The  best  system,  if 
perfect  freedom  be  allowed,  grows  naturally  out  of,  and  is 
thoroughly  adapted  to  the  wants  of  production  and  trade,  like 
all  other  contrivances  having  similar  objects.  Such  a  system, 
resting  wholly  upon  the  voluntary  consent  of  its  members, 
and  as  perfect  as  is  possible  in  all  its  important  features, 
had  existed  in  the  New  England  States  for  twenty  years  pre- 
vious to  the  Act  of  184:4.  It  continued  in  operation  down 
to  the  establishment  of  the  national  system  of  18G1,  which, 
being  purely  a  creation  of  law,  is  vicious  in  every  part,  and 


THE   SUFFOLK   BAXK   SYSTEM.  295 

wMch,  until  repealed  or  modified  in  every  important  particu- 
lar, will  be  found  to  be  an  insuperable  barrier  to  the  restora- 
tion of  the  currency  of  the  country.  From  the  New  England 
system,  English  statesmen  and  financiers  might  have  learned 
whatever  could  be  known  of  the  principles  of  a  paper  currency, 
and  of  their  application.  All  they  had  to  do  to  secure  the  best 
possible  system  for  themselves  was  to  copy  the  example  set 
them,  which  was  equally  adapted  to  their  country  as  it  was  to 
the  New  England  States.  The  latter  formed  a  geographical 
and  commercial  unit,  with  Boston  for  its  centre.  As  that  city 
was  the  creditor  of  them  all,  the  issues  of  all  their  Banks  nat- 
urally tended  toward  it.  All  that  was  wanting,  under  such 
conditions,  to  a  perfect  currency,  was  for  every  Bank  to  make 
good  all  its  issues  in  coin,  at  the  point  at  which  the  gTeater 
part  of  them  were  used,  and  to  which,  by  a  law  of  gra\'itation 
as  it  were,  whatever  was  issued  tended  constantly  to  flow,  as 
the  most  convenient  point  at  which  to  hold  it,  while  it  was 
awaiting  employment.  To  this  end,  all  the  Banks  of  these 
States,  numbering  at  one  time  five  hundred,  entered  into  an 
agreement  to  make  daily  redemptions  of  their  notes  and  credits, 
in  coin  or  its  equivalent,  at  the  Suffolk  Bank,  Boston,  from 
which  Bank  the  system,  if  such  it  may  be  called,  took  its  name. 
A  homogeneous  currency  was  thus  created  everywhere  witliin 
such  territory,  the  equivalent  of  coin,  and  ever}"where  accepted 
-by  the  Banks  and  by  the  public  as  such.  Whatever  was  the 
equivalent  of  coin  in  Boston  was  equally  so  in  every  part  of 
the  territory  dependent  upon  it.  By  being  so  in  Boston,  the 
notes  of  every  Bank  belonging  to  the  system  were  the  equiva- 
lent of  coin  in  every  part  of  the  United  States,  less  the  rate  of 
exchange  or  cost  of  remitting  coin,  wherever  such  notes  circu- 
lated, to  that  citv.  As  a  rule,  thev  were,  throuo-hout  the  whole 
country,  preferred  to  coin,  from  the  greater  ease  and  safety  of 
their  remittance  ;  and  for  the  reason  that  they  were  the  equiv- 
alent of  coin  in  New  York,  whenever  the  exchange  between 
that  city  and  Boston  was  in  favor  of  the  former.  While  the 
issues  of  these  Banks  were  thus  everywhere  the  equivalent  of 
coin,  the  system  from  its  perfection  required  the  least  possible 
amount  of  coin,  as  the  daily  redemptions  of  the  issuers  rendered 
it  impossible  that  any  considerable  excess  of  currency  should 
at  anv  time  sfet  into  circulation,  or  that  anv  considerable  bal- 
ances  should  arise  in  production  and  trade.     It  has  already 


296  HISTORY  OF   MONETARY  THEORIES. 

been  shown  that  were  all  the  interests  of  a  community  or 
nation  maintained  in  perfect  equilibrium,  its  exchanges  might 
be  effected  almost  wholly  by  the  use  of  symbols.     Such  a  con- 
dition of  equilibrium,  as  perfect  as  is  possible  in  any  country, 
was,  probably,  obtained  in  the  New  England  States  under  the 
system  described.     Only  a  small  amount  of  specie  had  to  be 
maintained  at  the  central  point ;  while  such  country  Banks  as 
had  sufficient  credit  in  Boston,  or  an  abundance  of  good  bills 
which  could  be  readily  sold  in  the  market,  had  to  keep  on  hand 
only  such  amount  as  was  required  by  way  of  change.     As  the 
contracts  or  bills  upon  which  the  currency  was  issued  ran  off 
on  an  average  every  ninety  days,  the  currency  was  retired 
within  the  same  periods.     So  perfect  was  this  system,  that  it 
is  not  probable  that  at  any  period  there  was  a  necessity  for  the 
suspension  of  the  Banks  composing  it,  arising  out  of  their  own 
condition.     In  1837, 1847,  and  1857,  they  followed  the  suspen- 
sion of  the  Banks  of  other  parts  of  the  country,  only  for  self- 
protection.     They  were,  in  all  instances,  the  last  to  suspend 
and  the  first  to  resume.     With  the  adoption  of  this  system  for 
the  whole  country,  with  New  York  as  the  central  point,  the 
issuing  of  the  currency  might,  without  the  least  danger  or 
apprehension,  be  thrown  open  without  regulation  or  restraint. 
The  public,  for  their  own  safety  and  convenience,  would  im- 
pose  limitations  upon   issue   and   provisions   for  redemption 
far  more  stringent  and  adequate  than  can  ever  be  provided 
by  law.     The  currency  so  issued  would  reflect,  and  be  entirely 
adapted  to,  the  wants  of  the  country  ;  and  would  be  regulated 
as  to  its  quantity  by  the  same  laws  by  which  the  quantity  of 
a  metallic  currency,  or  of  bills  of  exchange,  is  regulated.     For 
Englishmen  to  draw  their  reasons  against  competition  of  issue, 
and  in  favor  of  a  single  issuer,  from  the  assumed  system  of  the 
United  States,  is  as  absurd  and  inadequate  as  for  a  traveller  to 
describe  London  from  observations  made  among  the  mud  huts 
of  Ireland,  or  the  New  England  States  from  those  made  among 
the  tribes  of  savages  of  the  Pacific  coast. 

The  Act  of  1844,  among  other  tilings,  provided :  — 
1.  That  on  and  after  August  31,  1844,  the  issue  of  notes  by 
the  Bank  should  be  wholly  distinct  from  its  general  banking 
business,  and  managed  by  a  Committee  of  Directors,  under  the 
name  of  "  The  Issue  Department  of  the  Bank  of  England." 


ACT   OF   1844.  297 

2.  That  there  should  be  transferred  to  the  Issue  Depart- 
ment securities  to  the  value  of  X  14,000,000  (since  increased 
to  £15,000,000)  ;   of  which   the  debt  owed  by  the   govern- 
ment to  the  Bank,  amounting  to  £11,015,100,  was  to  form  a 
part ;  and  also  such  gold  coin  and  gold  and  silver  bullion  as 
the  Bank  at  that  time  possessed,  not  needed  to  conduct  the 
operations  of  the  Banking  Department.     In  exchange   there- 
for,  the  Issue  Department  was  to  deliver  over  to  the  Banking 
Department  an  amount  of  notes  equalling  in  nominal  value  the 
securities  held  by  the  former,  that  is,  £14,000,000,  and  the 
bullion  so  transferred  to  it.     No  increase  was  to  be  made  to 
the  securities  in  the  Issue  Department.     Their  amount,  how- 
ever, might  be  decreased  to  any  extent,  and  again  increased, 
but  not  beyond  the  limit  prescribed.     The  amount  of  securi- 
ties and  coin  and  bullion  transferred  to  the  Issue  Department 
at  the  time  equalled  £28,351,295 ;  that  is,  £14,000,000  of  se- 
curities, £12,656,200  of  gold  coin  and  bullion,  and  £1,695,095 
of  silver  bullion.      The  notes  delivered  at  the   time   to   the 
Banking  Department  equalled  £8,175,025;   the  balance,  that 
is,  £20,176,070,  being  at  the  time  in  the  hands  of  the  public. 
The  amount  of  gold  and  silver  coin  retained  by  the  Banking 
Department  equalled  £857,765  ;  making  the  total  capital  with 
which  it  began  business  £9,032,790.    The  only  mode  by  which 
this  department,  as  well  as  the  public,  could  draw  coin  from 
the  Issue  Department  was  a  presentation  of  notes,  which  were 
cancelled  as  they  were  taken  in.    The  coin  and  bullion  drawn, 
in  theory,  entered  into  circulation  in  ratio  to  the  amount  of 
notes  withdrawn.      The  Department  of  Issue  was  required, 
upon  an  increase  of  its  coin  or  bullion,  to  issue  to  the  Banking 
Department  a  corresponding  amount  of  coin.     By  these  con- 
trivances the  circulation  was,  in  theory  at  least,  to  be  always 
uniform  in  amount ;    such  amount  to  depend  not  upon  the 
action  of  the  Bank,  but  upon  that  of  the  public. 

3.  The  amount  of  silver  bullion  in  the  Issue  Department 
was  never  to  exceed  one-fourth  part  of  the  gold  coin  and 
bullion  held  by  it. 

4.  The  Issue  Department  was  required  to  purchase,  in  ex- 
change for  its  notes,  all  standard  gold  bullion,  at  the  rate  of 
£3  17s.  9d.  the  ounce. 

5.  If  any  banker  issuing  notes  on  the  6th  of  INIay,  1844, 
f|hould  cease  such  issue,  the  Bank  might,  by  the  permission  of 


298  HISTORY  OP  MONETARY  THEORIES. 

government,  increase  its  issues  upon  securities  equal  to  two- 
thirds  the  amount  so  lapsed. 

6.  After  the  passage  of  the  Act,  no  person,  other  than  a 
banker  who  was  lawfully  issuing  his  own  notes  on  the  6th 
of  May,  1844,  should  issue  bank-notes  in  any  part  of  the 
kingdom. 

7.  Any  banker  who  should  cease  to  issue  his  own  notes,  from 
any  cause  whatever,  after  the  passage  of  the  Act,  was  not  to 
resume  their  issue. 

8.  All  existing  Banks  of  issue  were  required  to  certify  forth- 
with the  places,  name,  and  firm,  at,  and  under  which  they  issued 
notes  during  the  twelve  weeks  which  preceded  the  27th  of 
April,  1844,  and  the  average  amount  of  such  issue  ;  and  no 
Bank  or  banker  was,  for  the  future,  to  be  allowed  to  exceed 
the  amount  of  such  average ;  if,  however,  any  two  or  more 
Banks  of  issue  had  become  united  within  the  said  twelve 
weeks,  the  issues  of  the  united  Bank  might  equal  the  aggre- 
gate of  those  composing  it.  If  two  or  more  Banks  became 
united  after  the  passage  of  the  Act,  each  of  less  than  six  part- 
ners, the  new  Bank  might  issue  notes  equalling  the  amount  of 
the  separate  issues  ;  but  if  the  partners  in  the  new  or  consoli- 
dated Bank  exceeded  six  members,  then  its  right  of  issue  was 
to  cease. 

Such,  in  its  more  important  features,  was  the  Act  of  1844. 
Its  effect  was,  in  the  place  of  one,  to  create  two  Banks  of 
issue.  The  first  was  to  hold,  or  was  assumed  to  hold,  at  all 
times,  means  (securities  and  coin)  equal  in  value  to  its  liabili- 
ties, and  sufficient  for  their  immediate  conversion  into  coin. 
The  credit  or  value  of  these,  consisting  wholly  of  notes,  was 
further  sustained  by  their  being  made  legal  tender  everywhere 
but  at  the  Bank ;  and  also  by  being  receivable  in  payment  of 
the  revenues,  which  exceeded  the  notes  by  three  times  the 
amount  ordinarily  in  circulation  ;  so  that,  should  the  means 
provided  for  their  redemption  wholly  fail,  their  value,  from 
the  uses  to  which  they  could  be  applied,  could  never  fall 
much,  if  any,  below  their  par  in  coin.  In  case  of  a  panic,  their 
holders  owing  debts  due,  either  presently  or  in  the  future, 
including  the  revenues  and  taxes  of  all  kinds,  would  have  no 
motive  to  con\ert  them  into  coin,  for  the  reason  that  it  would 
be  of  no  greater  value  to  them  than  notes,  wherever  the  latter 
could  be  used.     With  the  provision  described,  a  few  millions 


ACT   OF   1844.  299 

in  coin  would  be  all  that  would  ever  be  required  for  the  Issue 
Department  to  hold  to  meet  all  demands  likel}''  to  be  made 
upon  it.  Experience  has  shown  that  such  arguments  or  in- 
ferences would  have  been  entirely  correct.  No  panic  that  has 
occurred  since  the  Act  went  into  effect  has  ever  caused  a  con- 
siderable reduction  in  the  amount  of  notes  in  the  hands  of  the 
public.  A  large  part  of  the  coin  held  by  the  Issue  Department 
always  has  been,  and  always  will  be,  wholly  superfluous  to  its 
objects.  The  holders  of  its  notes  are  the  very  parties  who  do 
■  not  want  the  coin  for  them,  and  would  not  draw  it  if  they 
could  ;  at  least,  so  long  as  they  were  assured  that  they  would 
discharge  their  own  liabilities. 

The  provision  made  for  the  conversion  of  the  liabilities 
of  the  other  Bank  —  that  is,  of  the  Banking  Department, 
which  is  equally  with  the  former  a  Bank  of  issue,  and  whose 
issues  and  liabilities  are,  equally  with  notes,  payable  on  de- 
mand in  coin  —  is  a  small  amount  of  coin,  and  the  notes  of 
the  Issue  Department  which  it  may  happen  to  hold.  The 
Banking  Department,  of  course,  always  holds  securities  exceed- 
ing its  liabilities  ;  but  these  are  not  coin,  nor  are  they  imme- 
diately convertible  into  coin.  Its  issues  have  no  other  support 
than  that  described.  They  are  not  legal  tender,  nor  are  they 
receivable  in  the  payment  of  the  revenues.  It  would  naturally 
be  supposed,  that,  if  something  like  the  present  system  were 
to  be  established  —  that  is,  if  the  Bank  were  to  be  divided, 
as  at  present,  into  two  departments,  —  the  amount  of  coin  that 
would  be  transferred  to  that  of  issue  would  be  only  so  much 
as  would  be  required  to  meet  the  demands  liable  to  be  made 
upon  it :  the  balance,  whatever  it  might  be,  which  would 
always  be  the  greater  portion  of  what  the  Bank  might  hold, 
would  be  allotted  to  the  Banking  Department,  as  the  one 
chiefly  concerned  in  production  and  trade,  and  upon  which 
rest  the  whole  commercial  and  financial  interests  of  the  king- 
dom. This  is  an  obvious  mode  of  reasoning ;  but  reason  had 
no  more  to  do  with  the  matter  of  the  present  organization  of 
the  Bank  than  it  has  with  the  shape  or  color  of  an  amulet 
which  is  to  serve  as  a  fetish  to  sliield  one  from  harm. 

The  passage  of  the  Act  of  1844  exerted  no  apparent  influ- 
ence at  the  time ;  for,  so  long  as  there  was  no  considerable 


300  HISTORY  OF   MONETARY    THEORIES. 

demand  for  money,  it  was  immaterial  in  which  till  of  the  Bank 
its  notes  lay,  or  what  proportion  of  them  was  in  the  hands  of 
the  public.  So  long  as  the  condition  of  production  and  trade 
existing  at  the  time  of  the  reorganization  remained  unchanged, 
the  Act  was  a  dead  letter.  At  that  very  time,  however,  causes 
were  at  work  that  were  soon  to  put  it  to  the  test.  The  mania 
for  the  construction  of  railways,  which  culminated  in  1 847, 
had  already  gained  no  little  strength.  Up  to  the  17th  of 
November,  1845,  the  amount  already  expended  upon  the  com- 
pleted railways  in  the  United  Kingdom  equalled  £70,680,877  ; 
that  expended,  or  to  be  expended,  upon  those  in  process  of 
construction,  £67,317,325.  The  amount  which  the  companies 
chartered  up  to  January  1,  1849,  were  entitled  to  raise  upon 
share  capital  and  debentures,  equalled  £320,000,000,  as 
follows :  — 


Years. 

Acts. 

Tears. 

Acts. 

1801  to  1840 

299 

£69,000,000 

1846 

270 

£120,000.000 

1841  to  1844 

113 

18,000,000 

1847 

184 

85,000,000 

1845 

120 

59,000,000 

1848 

83 

19,000,000 

The  total  amount  called  up  in  1847  by  the  railway  schemes 
put  upon  the  London  market,  including  foreign  railways, 
equalled  the  enormous  sum  of  £47,000,000,  or  more  than 
£800,000  weekly.  During  the  same  year,  the  greatest  fluctua- 
tion in  the  amount  of  bank-notes  in  circulation  equalled  only 
about  £1,500,000.  The  monetary  transactions  having  refer- 
ence to  railways  were  carried  on  abuost  wholly  by  means  of 
checks  drawn  against  deposits  ;  the  notes  of  the  Bank,  as  well 
as  country  Banks,  being  hardly  a  makeweight  in  the  general 
mass.  The  enormous  amount  expended  on  account  of  these 
works,  in  1846  and  1847,  would  have  produced  a  financial 
crisis,  even  had  the  crops  for  those  years  been  favorable.  They 
proved  very  unfavorable.  The  Irish  potato  crop,  which  began 
to  fail  in  1845,  was  almost  wholly  cut  off  in  1846  and  1847. 
Large  importations  of  food  had  to  be  made,  requiring  the 
exportation  of  considerable  amounts  of  gold,  but  not  sufficient 
to  seriously  affect  the  money  market,  or  the  ability  of  the 
Bank,  as  the  great  monetary  institution  of  the  kingdom,  to 
lend.  It  was  the  immense  investments  in  railways,  many  of 
which  proved  unproductive,  and  the  consequent  stimulus  given 
to  all  branches  of  production  and  trade,  and  which  affected 
every  class  and  every  interest  in  the  kingdom,  that  caused,  by 


CAUSES   OF  THE  PAJSTIC   OF   1847.  301 

a  necessary  recoil,  the  panic  of  1847.  It  would  have  occurred, 
only  perhaps  a  little  later,  even  if  the  crops  had  not  been  un- 
favorable ;  and  with  almost  equal  severity,  had  not  the  Bank 
of  England  aided  it  to  the  extent  of  a  single  penny.  The 
Bank  undoubtedly  .contributed  something,  but  by  no  means  in 
the  ratio  that  its  capital  bore  to  that  of  the  other  Banks  and 
bankers  of  the  kingdom.  Its  means,  during  the  whole  period 
under  discussion,  were  in  great  measure  employed  in  the 
methods  and  according  to  the  precedents  of  the  past ;  so  that 
only  a  comparatively  small  fraction  of  them  found  its  way 
into  railways,  or  into  other  speculative  schemes,  which,  for  a 
time,  so  engrossed  the  attention  and  absorbed  the  means  of 
the  nation. 

The  enormous  amount  of  deposits  of  the  Bank  in  1846  was 
full  proof  of  the  magnitude  of  the  financial  operations  of  that 
year.  Their  excessive  reduction  showed  the  severity  of  the 
contraction  which  followed.  Their  amount,  at  the  reorgani- 
zation of  the  Bank,  on  the  7th  of  September,  1844,  equalled 
£12,274,000  ;  their  average  for  184.5  equalled  X17,300,000 ; 
for  1846,  £21,500,000.  For  the  first  three  quarters  of  that 
year,  their  average  equalled  £23,100,000.  The  average  amount 
held  in  1847  equalled  £14,750,000.  The  amount  of  notes  in 
circulation  on  the  7th  of  September,  1844,  equalled  £  20,176,270. 
In  1845,  the  average  was  £21,000,000  ;  in  1846,  £20,300,000; 
and  in  1847,  £20,000,000.  The  drain  upon  the  Bank,  chiefly 
by  its  depositors,  began  in  the  latter  part  of  1846  ;  reducing 
the  amount  of  deposits  in  February,  1847,  to  £14,600,000. 
The  drain,  which  had  to  be  met  by  the  notes  in  the  Banking 
Department,  reduced  these,  on  the  1st  of  January,  1847,  to 
£6,500,000,  and  on  the  3d  of  July,  1847,  to  £5,015,000.  From 
that  time  it  steadily  continued  till  the  23d  of  October,  1847, 
when  the  notes  in  the  Banking  Department  were  reduced  to 
£1,540,000  ;  its  deposits  at  that  time  standing  at  £13,500,000  ; 
its  specie,  at  £7,860,000 ;  and  its  notes  in  circulation,  at 
£20,860,000.  It  was  evident  that  the  Bank  could  not  go  on 
much  longer  ;  and,  on  the  28d  of  October,  a  deputation  of  Lon- 
don bankers  waited  upon  the  government  to  represent  the 
position  of  affairs,  and  the  consequences  that  must  result  from 
the  inability  of  the  Bank  to  make  further  loans.  On  Monday 
following,  October  27th,  Lord  John  Russell,  then  Chancellor 
of  the  Exchequer,  addressed  a  communication  to  the  Directors, 


802  HISTORY   OF   MONETAEY   THEORIES. 

informing  them,  that,  should  they  deem  it  necessary  to  exceed 
in  their  issues  the  limit  prescribed  by  the  Act  of  1844,  the 
government,  upon  the  assembling  of  Parliament,  would  apply 
to  it  for  an  Act  of  Indemnity.  The  communication  suggested 
that  such  advances  as  might  be  made  by  notes  issued  in  excess 
of  the  provisions  of  the  Act,  should  be  at  a  rate  of  interest  not 
less  than  8  per  cent.  The  communication  was  no  sooner  made 
public  than  confidence  was  instantly  restored.  The  notes 
which  had  been  hoarded  were  at  once  brought  into  use,  and 
discounts  were  everywhere  attainable.  So  instant  and  com- 
plete was  the  relief,  that  the  Bank  was  not  compelled  to  avail 
itself  of  the  authority  to  increase  its  circulation.^ 

The  crisis  past,  Parliament  was  speedily  called  together ; 
for,  although  the  Act  of  1844  was  not  violated,  the  authority 
to  do  so  had  been  given,  and  must  be  condoned.  Upon  its 
assembling,  the  Chancellor  of  the  Exchequer  moved  for  the 
Committee  usually  appointed  in  such  cases  "  to  inquire  into 
the  causes  of  the  recent  commercial  distress,  and  how  far  it 
had  been  affected  by  the  Act  of  1844."  In  the  course  of  his 
remarks,  after  describing  the  progress  of  the  panic,  which  he 
largely  ascribed  to  the  failure  of  the  Bank  in  not  taking  earlier 
measures  for  its  arrest,  he  said :  — 

"  The  Bank  of  England  were  pressed  directly  for  assistance  from 
all  parts  of  the  country,  and  indirectly  through  the  London  bankers, 
who  were  called  u})on  to  sup})ort  their  country  correspondents. 
The  country  Banks  required  a  large  amount  of  notes,  to  render 

1  When  the  Bank,  in  1847,  was  compelled  to  invoke  the  aid  of  government, 
it  had  £7,800,000  of  coin  in  its  vaults.  Of  tliis  sura,  only  £440,000  were  in  the 
Banking  Department.  That  department  had  at  the  same  time  only  £1,540,000 
in  notes,  making  a  total  of  £1,080,000  wherewith  to  carry  forward  the  opera- 
tions of  an  empire.  This  is  the  only  available  sum  it  had  for  the  discharge  of 
£13,500,000  of  deposits,  and  to  provide  the  means  for  the  loans  it  was  called  upon 
to  make.  When  the  panic  was  at  its  height,  over  £7,000,000  coin  were  unavail- 
able in  its  vaults.  The  average  amount  of  the  note  circulation  for  1847  equalled 
£20,000,000.  The  amount  in  circulation,  October  25th,  1847,  when  an  incrense  of 
its  notes  was  authorized,  equalled  £20,860,000,  —  a  sum  considerably  larger  than 
the  average  for  the  year.  The  panic  had  no  tendency  to  reduce  the  amount  of 
the  circulation.  It  resulted,  so  far  as  tlie  Bank  was  concerned,  not  in  any  want 
of  confidence  in  it,  or  in  the  solvency  of  its  notes,  only  from  fear  that  a  sufficient 
amount  of  these  could  not  be  had.  The  moment  such  fear  was  allayed,  the 
demand  for  them  instantly  ceased.  If  it  were  proper  to  quiet  this  alarm  by  en- 
larging the  authority  of  the  Bank,  why  not  invest  it  permanently  with  such 
power,  instead  of  compelling  it  to  throw  itself  upon  the  government  whenever  a 
crisis  arises  1 


SUSPENSION   OF  THE   ACT   OP   1844.  303 

them  secure  against  possible  demands,  not  so  much  for  payment  of 
their  notes  as  of  their  deposits.  Houses  in  London  Avere  applying 
constantly  to  the  Bank  for  aid.  Two  bill-brokers  had  stopped,  and 
the  operations  of  two  others  were  nearly  paralyzed.  The  whole 
demand  for  discount  was  thrown  upon  the  hands  of  the  Bank  of 
England.  Notwithstanding  this,  as  I  before  said,  the  Bank  never 
refused  a  bill  which  it  would  have  discounted  at  another  time  ;  but 
still  the  large  mass  of  bills  which,  under  ordinary  circumstances, 
are  discounted  by  bill-brokers,  could  not  be  negotiated.  During  that 
period,  we  were  daily  —  I  may  say  hourly  —  in  possession  of  the 
state  of  the  Bank.  The  Governor  and  Deputy-Governor  at  last  said 
they  could  no  longer  continue  their  advances  to  support  the  various 
people  who  applied  to  them  ;  that  they  could  save  themselves,  — 
that  is,  they  could  comply  with  the  law;  but  that  they  could  not  do 
so  without  pressing  more  stringently  on  the  commercial  world.  At 
this  crisis,  a  feeling  as  to  the  necessity  of  the  interposition  of  gov- 
ernment appeared  to  be  generally  entertained ;  and  those  conver- 
sant with  commercial  affiiirs,  and  least  likely  to  decide  in  favor  of 
the  course  we  ultimately  adopted,  unanimously  expressed  an  opin- 
ion that,  if  some  measure  were  not  taken  by  the  government  to 
arrest  the  evil,  the  most  disastrous  consequences  must  inevitably 
ensue.  Evidence  was  laid  before  the  government  which  proved, 
not  only  the  existence  of  severe  pressure  from  the  causes  I  have 
stated,  but  also  that  it  was  aggravated  in  a  very  great  degree  by 
the  hoarding,  on  the  part  of  many  persons,  of  gold  and  bank-notes, 
to  a  very  large  extent ;  in  consequence  of  Avhich  an  amount  of  cir- 
culation which,  under  ordinary  circumstances,  would  have  been 
adequate,  became  insufficient  for  the  wants  of  the  community.  It 
was  difficult  to  establish  this  beforehand,  but  the  best  proof  of  the 
fact  is  in  what  occurred  after  we  interfered.  As  soon  as  the  letter 
of  the  12th  October  appeared,  and  the  panic  ceased,  thousands  and 
tens  of  thousands  of  pounds  were  taken  from  the  hoards,  —  some 
from  boxes  deposited  with  bankers,  although  the  parties  would  not 
leave  the  notes  in  their  banker's  hands.  Large  parcels  of  notes  were 
returned  to  the  Bank  of  England  cut  into  halves,  as  they  had  been 
sent  down  into  the  country ;  and  so  small  was  the  real  demand  for 
an  additional  quantity  of  notes,  that  the  whole  amount  taken  from 
the  Bank,  when  the  unlimited  power  of  issue  wfis  given,  was  under 
£400,000.  The  restoration  of  confidence  released  notes  from  their 
hoards  ;  and  no  more  was  wanted,  for  this  trifling  quantity  of  addi- 
tional notes  is  hardly  worth  notice.  .  .  .  Parties  of  every  descrip- 
tion made  application  for  assistance  to  us,  with  the  observation, 
'  We  do  not  want  notes  ;  but  give  us  confidence.'  They  said  '  We 
have  notes  enough  ;  bi;t  we  have  not  confidence  to  use  them.  Say 
you  will  stand  by  us,  and  we  shall  have  all  that  we  want ;  do  every 
thing,  in  short,  that  will  give  us  confidence.  If  you  think  that 
we  can  get  bank-notes,  we  shall  not  want  them.  Charge  any  rate 
of  interest  you  please  ;  ask  what  you  like.'  "  —  (Mr.  Spooner,  "  No, 
no  !  ")  —  "  i  beg  pardon  of  the  honorable  gentleman  ;  but  I  may  be 

fermitted  to  know  what  was  actually  said  to  me.     I  say,  that  what 
have  stated  was  the  tenor  of  the  applications  made  tome.    Parties 


304  HISTORY  OF  MONETARY   THEORIES. 

said  to  me,  'Let  us  have  notes,  charge  10  to  12  per  cent  for  them  ; 
we  don't  care  what  the  rate  of  interest  is.  We  don't  mean,  indeed, 
to  take  the  notes  ;  because  we  shall  not  want  them.  Only  tell  us 
that  we  can  get  them,  and  this  will  at  once  restore  confidence.' 
We  have  been  asked  what  was  the  change  of  circumstances  which 
induced  us  to  act  on  Saturday,  when  we  declined  acting  a  day  or 
two  before.  I  reply,  that  the  accounts  which  we  received  on 
Thursday,  Friday,  and  Saturday,  were  of  a  totally  different  de- 
scription from  those  which  had  been  previously  brought  us.  It 
was  on  Saturday,  and  not  before,  that  this  conviction  was  forced 
upon  us  ;  and  it  was  not  till  then  that  we  felt  it  necessary  to  sanc- 
tion a  violation  of  the  law." 

Sir  Robert  Peel  followed,  in  a  more  apologetic  strain.  As 
the  responsible  author  of  the  Act  of  1844,  he  was  not  a  little 
chagrined  at  the  result.  It  was  unfair,  he  said,  that  he  should 
be  singled  out  as  the  great  object  of  attack.  The  Act  was  not 
his  own,  but  of  Parliament.  It  had  been  alleged  that  it  had 
been  passed  without  due  consideration ;  but  the  subject  was 
one  upon  which  Committees  had  sat  for  five  years,  and  during 
their  investigations  had  asked  more  than  14,000  questions,  and 
received  more  than  14,000  answers.  As  nothing  practical  had 
come  of  them  all,  the  government  determined  to  pass  some 
measure  upon  its  own  responsibility.  If  the  one  adopted  were 
inadequate  to  its  objects,  he  was  ready  to  accept  any  provision 
necessary  to  render  it  so. 

"  There  has,"  said  Sir  Robert,  "  been  some  misrepresentation 
respecting  the  object  of  this  Act.  I  do  not  deny  that  one  of  the 
objects  contemplated  by  the  Act  was  the  prevention  of  the  con- 
vulsions that  had  heretofore  occurred  in  consequence  of  the  neglect 
by  the  Bank  of  England  to  take  early  precautions  against  the 
withdrawal  of  its  treasure.  I  did  hope  that,  although  there  was 
no  imperative  obligation  on  the  Bank  of  England  to  take  these 
precautions,  that  the  experience  of  182.5,  1836,  and  1837,  would 
have  induced  that  establishment  to  conform  to  principles  which  the 
Directors  of  the  Bank  acknowledged  to  be  just,  and  which  they 
had  more  than  once  professed  to  adopt  for  their  own  regulation. 
Sir,  I  am  bound  to  say  that  in  that  hope,  that  in  that  object  of 
the  bill,  I  have  been  disappointed.  I  am  bound  to  admit,  seeing 
the  extent  of  commercial  depression  which  has  prevailed,  and  the 
number  of  houses  which  have  been  swept  away,  —  some  of  which, 
however,  I  think,  were  insolvent  long  before  the  bill  came  into 
operation,  and  others  of  which  became  insolvent  in  consequence  of 
the  failure  of  those  who  w^ere  connected  with  them  and  were  im- 
prudent in  their  speculations,  —  I  am  bound  to  admit,  that  that  pur- 
pose of  the  bill  of  1844,  which  sought  to  impress,  if  not  a  legal,  at 


SUSPENSION  OF  THE   ACT   OF   1844.  305 

least  a  moral  obligation  on  the  Bank,  to  prevent  the  necessity  for 
measures  of  extreme  stringency  by  timely  precautions,  has  not 
been  fulfilled.  Sir,  I  must  contend,  that  it  was  in  the  power  of 
the  Bank,  if  not  to  prevent  all  the  evils  that  have  arisen,  at  least 
greatly  to  diminish  their  force.  If  the  Bank  had  possessed  the 
resolution  to  meet  the  coming  danger  by  a  contraction  of  its  issues, 
by  raising  the  rate  of  discount,  by  refusing  much  of  the  accommo- 
dation which  they  granted  between  the  years  1844  and  1846;  if 
they  had  been  firm  and  determined  in  the  adoption  of  these  precau- 
tions, —  the  necessity  for  extrinsic  interference  might  have  been  pre- 
vented ;  it  might  not  then  have  been  necessary  for  the  government 
to  authorize  a  violation  of  the  Act  of  1844.  .  .  .  The  bill  of  1844 
had  a  triple  object.  Its  first  object  was  that  in  which  I  admit  it  has 
failed  ;  namely,  to  prevent,  by  early  and  gradual,  severe  and  sudden 
contraction,  and  the  panic  and  confusion  inseparable  from  it.  But 
the  bill  had,  at  least,  two  other  objects,  of  at  least  equal  impor- 
tance :  the  one  to  maintain  and  guarantee  the  convertibility  of  the 
paper  currency  into  gold  ;  the  other  to  prevent  the  difficulties  which 
arise  at  all  times  from  undue  speculation  being  aggravated  by  the 
abuse  of  paper  credit  in  the  form  of  promissory  notes.  In  these 
two  objects,  my  belief  is  that  the  bill  has  completely  succeeded ; 
my  belief  is,  that  you  have  had  a  guarantee  for  the  maintenance  of 
the  principle  of  convertibility,  such  as  you  never  had  before ;  my 
belief  also  is,  that,  whatever  difliculties  you  are  now  suffering,  from 
a  combination  of  various  causes,  those  difficulties  would  have  been 
greatly  aggravated  if  you  had  not  wisely  taken  the  precaution  of 
checking  the  unlimited  issues  of  the  notes  of  the  Bank  of  England, 
of  joint-stock  Banks,  and  private  Banks." 

Whenever  there  is  an  eccentric  movement  or  disturbance  in 
the  money  market,  the  Bank  always  comes  in  for  censure.  It 
is  always  made  the  universal  scape-goat.  After  such  crises 
as  those  of  1847,  1857,  and  1866,  the  censure  is  unmeasured. 
"  The  Bank  should  not  have  reissued  its  notes ; "  "  it  should  long 
ago  have  refused  to  make  any  further  loans;"  "it  should  have 
contracted  the  circulation  by  the  sale  of  its  securities."  The 
Bank  can  do  nothing,  nor  does  it  attempt  to  do  any  thing,  of 
the  kind.  It  is  the  regular  issuer  and  manager  of  the  currency, 
and  must  issue  it  to  every  one  who  comes  within  rules  estab- 
lished, not  in  periods  of  panics,  but  when  the  supply  of  money 
may  have  exceeded  the  demand.  The  public,  not  itself,  is  the 
judge  of  the  amount  of  circulation  required.  It  met  all  appli- 
cations in  1847,  1857,  and  1866 ;  it  can  adopt  no  other  rule. 
It  says,  to  the  government,  in  effect :  "  As  we  are  to  supply 
the  circulation,  we  shall  do  so  as  long  as  we  have  a  note  in 
our  till ;  you  have  provided  the  mode  in  which  it  is  to  be 
issued.     When   our  notes   are   exhausted,  you  are  to   make 

20 


306  HISTORY   OF   MONETARY   THEORIES. 

further  provision,  or  assume  responsibility  for  the  conse- 
quences." Such  is  the  construction  which  has  always  been 
put  upon  the  Act,  both  by  the  government  and  by  the  Bank ; 
and  this  is  the  only  logical  one.  If  the  currency  is  to  be  pro- 
vided by  legislation,  such  legislation  must  in  some  form  be 
adequate  to  its  objects.  The  mint  must  turn  into  coin  all  the 
bullion  offered  to  it.  The  Bank  in  the  same  way  must  turn 
into  notes  all  the  securities  of  the  proper  kind  offered  to  it. 
There  is  no  more  discretion  in  one  case  than  in  the  other.  The 
operations  of  society  are  not  to  be  blocked  by  any  such  folly 
as  that  of  1844.  When  these  are  imperilled,  the  Act  is  but  a 
straw  in  the  current  of  a  Niagara.  Its  suspension,  which  is  a 
matter  of  necessity,  is  universally  acquiesced  in.  No  act,  how- 
ever, can  be  more  revolutionary  than  for  a  government  to 
arrest  the  operation  of  a  law,  and  still  continue  it  in  full  force 
on  the  statute-book.  Such  is  the  respect  for  order  in  England 
that  such  precedents  are  little  to  be  feared.  For  the  most  com- 
mercial and  one  of  the  most  intelligent  people  in  the  world, 
however,  to  make  a  public  confession  of  their  inability  to  deal 
with  such  a  matter  as  the  Bank,  but  by  declaring  it,  when  a 
crisis  arises,  to  be  absolved  from  the  observance  of  its  organic 
rule  or  law,  implies  an  ignorance  or  an  impotence  certainly  not 
very  flattering  to  their  national  pride. 

Sir  Robert  Peel  frankly  admitted  the  Act  of  1844  to  be  no 
safeguard  against  commercial  or  monetary  disturbance.  So 
far  it  was  an  entire  failure.  It  was,  however,  he  claimed,  suc- 
cessful in  guaranteeing  the  convertibility  of  the  notes  of  the 
Bank  into  coin,  and  in  preventing  an  aggravation  of  the  panic 
by  their  excessive  issue.  As  it  was  not  the  coin  in  the  Bank 
which  maintained  its  notes  at  par,  —  such  coin  at  one  time 
equalling  only  about  one-third  their  amount, — but  the  other 
provisions  in  their  favor  wliich  have  already  been  described, 
Sir  Robert  was  reduced  to  one  advantage  only  as  resulting 
from  the  Act.  As,  however,  deposits  exert  precisely  the  same 
influence  as  notes,  in  causing  lavish  expenditures  and  inflation- 
of  prices,  which  must  always  end  in  a  panic  greater  or  less  in 
severity,  it  is  not  easy  to  see  that  any  thing  was  gained  by 
restricting  the  issue  of  notes,  when  deposits,  which  can  always 
be  created  in  unlimited  amounts  by  Banks  and  bankers  and 
their  customers,  were  certain  to  take  their  place.     He  might 


LORD   OVEESTOXE   ON   THE   SUSPENSION   OF   THE   ACT.     307 

with  equal  propriety  have  congratulated  the  good  fortune  of 
a  man,  who,  having  become  thoroughly  intoxicated  by  the 
excessive  use  of  brandy,  of  which  he  had  a  profuse  supply, 
could  not  supplement  his  brandy  by  an  excessive  use  of 
whiskey.  Sir  Robert's  two  advantages,  therefore,  have  only 
to  be  very  briefly  analyzed  to  vanish  in  empty  air. 

The  crisis  of  1847  was  no  sooner  past  than  the  ine%'itable 
Committee  or  Committees  —  for  in  tliis  case  each  House  raised 
its  own  —  was  appointed  "to  consider  the  subject  of  the  recent 
commercial  distress."  These  Committees  added  some  10,000 
more  questions  and  answers  to  the  14,000  which  had  been  put 
and  received  by  previous  ones,  —  all,  or  nearly  all,  upon  the 
nature  of  paper  money,  and  the  constitution  and  conduct  of  the 
Bank.     Lord  Overstone,  as  usual,  was  the  conspicuous  figure. 

Question  5126  (of  the  House  Committee),  "When  the  Act  of 
1844  was  brought  in,  I  think  (said  the  Chairman)  there  was  an 
impression,  upon  the  minds  of  some  parties  at  least,  that  the 
operation  of  the  Act  would  tend  to  mitigate  those  convulsions 
when  they  came  on,  even  supposing  it  was  impossible  that  that 
Act,  or  any  Act,  could  prevent  thera ;  there  was  an  impression 
that  they  would  be  of  a  less  sudden  character  than  they  were 
before  ;  was  that  your  expectation  ?  "  —  "  My  expectation  was, 
that  the  Act  would  mitigate  that  portion  of  commercial  pressure, 
which  was  justly  attributable  to  the  mismanagement  of  the  circula- 
tion ;  and  the  only  point  upon  which  any  difficulty  could  exist  was 
in  determining  what  portion  of  the  pressure  of  the  different  crises 
had  really  arisen  from  the  mismanagement  of  the  circulation,  and 
what  portion  had  arisen  entirely  from  the  ordinary  excess  of  mer- 
cantile enterprise.  I  think  the  Act  has  completely  realized  all  that 
was  reasonably  expected  of  it,  and  has  verified  every  principle  upon 
which  it  was  established.  I  think  that  the  pressure  of  1847  would 
have  been  considerably  more  severe,  postponed  probably  to  rather 
a  later  period,  but,  when  it  came,  much  more  severe,  if  there  had 
been,  in  the  early  part  of  1847,  a  power  of  mismanaging  the  circula- 
tion of  the  country;  the  Act  of  1844,  by  preventing  that  power, 
brought  on  the  pressure  earlier,  and  by  that  means  rendered  the 
pressure  much  less  severe  than  it  would  have  been  at  a  later  period, 
and  with  the  bullion  reduced  to  a  much  lower  amount." 

Question  5127.  "  Will  you  allow  me  to  call  your  attention  to  that 
part  of  the  question  which  relates  to  the  suddenness  of  the  difficul- 
ties? I  think  there  was  an  impression  at  the  time  of  the  passing  of 
the  Act,  that,  the  withdrawing  of  the  circulation  being  gradual,  the 
pressure  would  be  extended  over  a  longer  time,  and  that  it  would 
not  be  sudden,  and  the  pinch  would  not  be  so  great  when  it  cune. 
Do  you  think  the  Act  has  been  effective  in  that  respect,  or  that  the 


308  HISTORY  OF  MONETARY  THEORIES. 

circumstances  under  the  Act  have  been  such  as  you  expected  m 
regard  to  that?"  —  "The  course  of  events  under  the  Act  has  not 
been  at  all  different  from  what  I  should  have  expected;  it  was 
anticipated  that  the  Act  would  produce  this  effect,  viz.,  that  it 
would  cause  a  gradual  contraction  of  the  circulation,  and  that,  under 
ordinary  circumstances,  a  certain  portion  of  that  contraction  of  the. 
circulation  would  fall  upon  the  notes  in  the  hands  of  the  public ;  at 
the  same  time,  it  was  perfectly  true  that  the  contraction  of  the  cir- 
culation might  assume  one  of  two  forms, — either  a  contraction  in  the 
numerical  amount  of  the  notes  in  the  hands  of  the  public,  or,  in  lieu 
of  that,  a  contraction  in  the  efficiency  of  the  existing  amount  of 
notes ;  in  which  form  the  contraction,  on  any  given  occasion,  will 
take  place,  will  depend  in  some  degree  on  accidental  circumstances  ; 
it  seems  to  me  that  two  accidents  occurred  in  the  year  1847  :  the 
mismanagement  of  the  banking  business  of  the  Bank  in  the  spring 
of  1847,  and  the  extraordinary  extent  of  commercial  failures  in  the 
autumn  of  1847  ;  had  these  two  accidents  not  occurred,  I  apprehend 
that  the  course  of  things  in  1847  would  have  been  precisely  identi- 
cal with  that  which  is  intimated  in  the  question  ;  viz.,  that  we  should 
have  had  a  considerable  export  of  bullion,  and  a  considerable  con- 
traction in  the  numerical  amount  of  the  notes  in  the  hands  of  the 
public,  followed  by  a  high  rate  of  interest,  and  that,  probably,  con- 
tinuing for  several  months.  That  high  rate  of  interest  so  contin- 
uing would  have  corrected  the  exchanges,  and  have  gradually 
brought  back  the  gold  ;  that  would,  probably,  have  been  the  course 
of  things  under  the  pressure  of  1847,  barring  the  two  accidents 
already  alluded  to." 

This  answer  reminds  one  of  Leech's  illustration  of  the  Irish- 
man's boat :  "  And  shure  if  yer  honors  sit  parfectly  still,  and 
don't  cough  or  snaze,  shell  carry  jou  all  illigant."  The  pas- 
sengers did  cough  and  sneeze,  and  the  crazy  craft  went  to  the 
bottom. 

Committees  of  Parliament  to  consider  grave  questions,  as 
they  arise,  have  come  to  be  institutions  with  Englishmen. 
Those  appointed  previous  to  and  in  1848,  to  consider  the  sub- 
jects of  currency  and  the  Bank,  were  years  in  session,  and 
asked  and  received  some  twenty-five  thousand  questions  and 
answers ;  not  one  of  which,  it  may  safely  be  assumed,  was  asked 
or  answered  with  any  appreciation  whatever  of  the  laws  or 
principles  of  paper  money,  except  such  answers  as  were  made, 
in  1810,  by  the  Directors  of  the  Bank,  in  their  examination 
before  the  Bullion  Committee.^     It  could  not  be  otherwise. 

1  The  answers  to  the  Bullion  Committee  of  the  Directors  of  the  Bank,  which 
maintained  its  loans  to  be  properly  made  so  long  as  it  discounted  bills  having 
sixty  days  to  run,  and  representing  real  transactions  in  merchandise,  were  at  the 


SUSPENSI02!f   OF   THE  ACT   OF   1844.  309 

With  that  single  exception,  all  the  questions  and  answers 
assumed  the  correctness  of  the  dogmas  of  Adam  Smith,  each 
one  of  which  was  wholly  without  adequate  foundation.  With 
such  premise  it  was  inevitable  that,  the  greater  the  number  of 
questions  asked  and  answered,  the  more  involved  in  confusion 
and  error  the  subject  became.  Their  almost  infinite  number, 
when  half  a  dozen,  properl}-  put  and  answered,  would  have 
made  the  whole  matter  palpable  to  the  meanest  understand- 
ing, is  of  itself  full  proof  of  the  utter  ignorance  and  chaos  of 
opinion  which  prevailed.  When  truth  is  discovered,  opinions 
are  in  accord.  When  it  is  not,  individuality  asserts  itself,  and 
there  are  as  many  theories  and  explanations  as  there  are  parties 
to  give  them. 

Englishmen  assume  themselves  to  be  the  especial  champions 
of  freedom  of  trade.  This  is  based  upon  the  idea  that  indi- 
viduals know  better  than  governments  the  methods  and  condi- 
tions necessary  to  their  own  welfare,  and  that  individual  welfare 
makes  up  that  of  society.  If  one  in  tliat  country  embark  in 
any  industrial  enterprise,  government  does  not  prefer  its  advice 
as  to  its  nature  and  management.  If  a  ship  be  to  be  built,  it  does 
not  insist  upon  the  model.  If  a  bill  of  exchange  be  ojffered  for 
sale,  it  does  not  interpose  in  order  that  the  purchaser  ma}'  get 
an  equivalent  for  his  money.  In  all  such  matters  it  adopts,  to 
the  fullest  extent,  the  laissez  faire  policy.  But,  when  a  person 
vrishes  to  exchange  his  own  obligation  for  the  notes  of  the 
Bank,  it  then  steps  in  to  provide  the  conditions  upon  which 
the  exchange  shall  be  made.  Why  should  not  the  same  free- 
dom be  allowed  in  one  case  as  in  the  other  ?  Why  should  not 
the  holder  of  a  bill  and  the  Bank  enter  into  any  agreement 
for  the  exchange  of  their  obligations  in  whatever  form  they 
please  ?  It  is  not  a  question  of  morals,  but  of  affairs.  Why 
should  not  the  Bank  determine  the  proper  limit  of  issue  of 
notes,  as  the  public  does  the  amount  of  commercial  bills  proper 
to  be  drawn  ?  The  answer  is,  that  the  issue  of  paper  money  is 
really  a  function  of  the  government,  which,  when  usiu-ped  by 

time,  and  have  ever  since  been,  received  with  derisive  jeers.  Mr.  Bagehot,  in 
saying  "that  their  answers  made  nonsense  classical;"  and  that  "  very  few  per- 
sons could  have  managed  to  commit  so  many  blunders  in  so  few  words,"  ex- 
presses the  general  contempt  felt  for  the  answers,  as  well  as  for  their  authors.  — 
Lombard  Street,  pp.  175,  176. 


o 


10  HISTORY   OF    MONETARY   THEORIES. 


individuals,  is  to  be  tolerated  only  from  necessity,  not  encour- 
ao-ed.  But  a  note  of  the  Bank  does  not  differ  in  its  nature 
from,  nor  has  it  inherently  any  higher  dignity  than,  a  note  or  a 
bill  given  for  a  sheep  or  a  cow.  The  right  to  issue  not^s  to 
serve  as  money  was  a  right  at  common  law  previous  to  the 
Act  of  1844.  Are  not  the  Bank  and  the  public  competent  to 
decide  what  is  for  the  advantage  of  each  ?  If  the  holder  of  a 
bill  wish  it  converted  into  money,  why  not  allow  this  to  be 
done  in  whatever  manner  suits  his  convenience  or  that  of  the 
issuer  ?  A  currency,  to  be  adequate  to  its  objects,  should  sym- 
bolize all  merchandise  entering  into  consumption.  If  the  right 
to  issue  notes  be  unrestricted,  the  nation,  it  is  urged,  will  be 
flooded  with  them,  and  the  most  terrible  disasters  will  be  the 
result.  But  if  notes  be  not  allowed,  the  money  created  in 
other  forms  will  equal  the  notes  which,  but  for  the  restriction, 
would  have  been  issued,  and  produce  precisely  the  same  con- 
sequences. But  would  a  perfect  freedom  in  the  issue  of  either 
form  of  money  be  likely  to  produce  the  disasters  predicted? 
For  every  issue  of  notes  or  credits  it  makes,  the  Bank  under- 
takes to  pay  out,  and,  if  it  make  an  improper  issue,  must  pay 
out,  an  equal  amount  of  coin.  It  will,  therefore,  be  under  no 
more  inducement  to  spread  its  notes  broadcast  than  coin,  or 
its  liabilities  in  other  forms  in  the  creation  of  which  it  is 
wholly  unrestricted.  How,  then,  is  an  excessive  issue  of  notes 
to  be  got  into  circulation  ?  The  Bank  will  not  knowingly  fool 
away  its  capital.  Ever}-  borrower,  also,  undertakes  to  pay 
coin,  or  its  equivalent,  for  the  notes  and  credits  issued  to  him  ; 
so  that  he  will  take  good  care  to  receive  no  notes  that  are  not 
of  equal  value  to  that  which  he  contracts  to  pay.  Both  Bank 
and  borrower  are  constantly  on  their  guard  ;  neither  will  incur 
a  liabihty  without  receiving  an  equivalent ;  and,  so  long  as 
equivalents  are  exchanged,  no  harm  can  come  therefrom,  but 
great  good,  as  the  welfare  of  society  depends  upon  the  free- 
dom with  which  its  exchanges  are  made.  The  theory,  there- 
fore, upon  which  the  Act  of  1844  proceeds,  is  that  mankind, 
that  the  holders  of  capital,  are  not  to  be  trusted  with  its  man- 
agement ;  that  they  are  imbeciles,  not  to  be  freed  from  the 
leading-strings  of  government.  Such  is  the  monstrous  conclu- 
sion to  which  the  Act  necessarily  leads. 

Among  the  witnesses  examined  before  the  Committee  of 


EYIDEXCE   BEFORE  THE   C0:NDIITTEE   OF   1848.  311 

1848  were  the  Governor  and  Deputr-Governor  of  the  Bank. 
These  were,  at  last,  the  loudest  in  praise  of  the  virtues  of  the 
Act  of  1844 ;  the  object  of  which,  they  said,  repeating  the  words 
of  Lord  Overstone,  "was  to  place  the  circulation  of  the  country 
exactly  in  the  position  that  it  would  have  been  had  it  been 
purely  metalKc."  They  declared  "  that,  with  regard  both  to 
the  contraction  and  expansion  of  the  currency,  they  would  both 
have  taken  place  under  the  Act  precisely  in  the  same  mode, 
and  to  the  same  degree  had  the  currency  been  purely  metallic." 
They  had  learned  their  lesson  well.  They  had  had  enough  of  par- 
liamentary and  financial  Petruchios  ;  and  were  only  too  happy 
to  purchase  quiet,  and  exemption  from  further  interference,  by 
declaring  the  same  object  to  be  white  or  black,  according  to 
the  caprice  of  their  imperious  masters.  They  even  volunteered 
to  reproach  themselves  for  their  conduct  in  not  arresting  the 
course  of  the  panic,  by  raising  the  rate  of  interest  in  the  spring 
of  1847.  They  claimed,  however,  that  the  action  of  the  gov- 
ernment in  setting  aside  the  Act  of  1844  was  not  solicited,  and 
that  it  was  not  necessarv  to  the  solvencv  of  the  Bank,  although 
it  was  of  great  use  in  quieting  the  panic  ;  which  would,  prob- 
ably, have  occurred  had  the  Act  never  been  passed.  Its  severity 
was  greatly  mitigated  by  the  action  of  the  government.  The 
great  merit  claimed  by  them  for  the  Act  was,  that  when  the 
pressure  did  come,  it  left  the  Bank  in  the  possession  of 
£8.000.000  of  coin  and  bullion,  which  those  who  were  enti- 
tled to  draw  it  did  not  want,  and  which  those  to  whom  the 
Bank  was  indebted  to  a  much  greater  amount  did  want,  and 
could  not  reach.  If  one-half  this  sum  could  have  been  trans- 
ferred fi'om  the  branch  in  which  it  was  Ivingr  whollv  useless  to 
the  one  which  was  rapidly  becoming  exhausted  of  its  means, 
the  panic  might  have  been  averted  without  the  action  of  the 
government,  and  long  before  its  interference.  The  timely 
transfer  of  such  a  sum  would  have  saved  the  nation  ten  times 
its  amount.  The  generalship  of  the  Act  is  that  of  a  com- 
mander who  fights  the  battle  with  only  one-half  the  forces  he 
has  in  hand,  and  suffers  in  consequence,  disastrous  defeat, 
although  complete  victory  would  have  been  assured  had  he 
brought  the  other  half  into  the  field.  There  was  all  the  time 
an  abundance  of  money ;  but  for  fear  that  the  issues  of  the 
future  might  be  greatly  restricted,  every  one  holding  a  note  or 
a  guinea  hoarded  it  against  a  wet  day.     The  consequence  was 


812  HISTORY  OF  MONETARY  THEORIES. 

that  business  men,  who  had  been  quietly  occupied  with  their 
affairs,  suddenly  woke  up  to  the  conviction  that  the  ordinary 
instruments  of  exchange  might,  in  a  short  time,  be  wholly 
refused  them.  It  was  as  if  the  air  necessary  to  sustain  life 
were  to  be  so  reduced  in  amount  as  to  suffice  for  only  one-tenth 
the  number  accustomed  to  breathe  it.  Hence  the  frantic  strug- 
gle which  followed :  it  was  a  struggle  for  dear  life.  As  soon 
as  it  was  seen  that  there  was  to  be  enough  for  all,  apprehen- 
sion instantly  subsided:  affairs  at  once  relapsed  into  their 
accustomed  routine.  Is  it  wise,  every  ten  years,  to  put  the 
nation  into  such  an  extremity  by  allowing  an  institution,  upon 
whose  operations  the  affairs  of  a  world,  as  it  were,  turn,  to 
create  enormous  liabilities,  at  the  same  time  denying  to  it  all 
means  for  their  payment  ? 

The  Governor  and  Deputy-Governor,  in  the  conclusion  of 
their  evidence,  prayed  that  government  would  make  no  altera- 
tion in  the  Act,  save  perhaps  t6  allow  a  larger  issue  of  notes 
upon  silver  bullion. 

The  Act  of  1844  has  been  dwelt  upon  at  length,  for  the  rea- 
son that  it  afforded  a  suitable  opportunity  for  illustrating  the 
principles  laid  down  in  the  first  part  of  this  work,  and  the 
opinions  prevailing  in  England,  as  well  as  in  this  country, 
upon  the  subject  of  money;  for  opinions  on  this  only  echo 
those  on  the  other  side  of  the  water.  From  the  vast  mass  of 
works  on  the  subject,  it  is  possible  only  to  present  the  argu- 
ments and  views  of  the  leading  authorities.  The  literature  of 
money  and  banking,  probably,  exceeds  in  extent  that  upon 
any  other  subject  whatever.  It  is  all  the  same  in  kind ;  so 
that  when  the  theories  of  a  representative  writer  are  pre- 
sented, those  of  all  others  are  matters  of  easy  inference.  The 
science  of  money,  as  laid  down  in  the  books,  bears  the  same 
relation  to  the  subject  itself  that  Alchemy  did  to  chemistry. 
Having  once  demonstrated  that  gold  cannot  be  produced  by 
any  mixture  of  the  baser  metals,  it  is  useless  to  spend  time  in 
proving  that  it  cannot  after  the  method  of  Geber  or  of  Ray- 
mond Lulli.  To  refute  each  one  of  the  Alchemists  who  claimed 
such  power,  a  life-time  would  not  suffice.  So  a  refutation  of 
Adam  Smith  may  be  properly  accepted  as  a  refutation  of  all 
his  followers.  So  with  the  Bank.  Lord  Overstone,  the  real 
author  of  the  Act  of  1844,  was  to  it  what  Adam  Smith  was  to 


THO^NIAS   TOOKE.  313 

Political  Economy:  the  greater  includes  the  less.  All  the 
writers  upon  the  Bank  since  Lord  Overstone's  Essays,  in  1837, 
have  simply  repeated  one  far  greater,  in  statement  at  least, 
than  themselves.  The  lesser  lights,  therefore,  need  not  be 
dwelt  upon.  To  do  this  would  swell  into  a  dozen  volumes  what 
is  intended  to  be  embraced  in  one.  The  curious  may,  if  they 
will,  enter  the  boundless  field ;  from  which  they  will  be  likely 
to  return,  if  ever,  far  less  wise  than  when  they  started  upon 
their  perilous  and  weary  way.  What  the  public  require  is  an 
outline  which  shall  be  measurably  brief,  and  still  shall  present 
all  that  is  really  necessary  to  be  known.^ 

A  prominent  figure  before  the  Committees  of  Parliament, 
upon  the  subject  of  money  and  the  Bank,  as  well  as  a  great 
authority  with  modern  Economists,  was  Mr.  Thomas  Tooke, 
who  dedicated  a  life-time  to  the  work  of  proving  that  a  rise  in 
prices  always  precedes,  and  causes  an  increase  of  money,  in 
whatever  form  ;  in  other  words,  that  a  rise  of  water  in  rivers 
always  precedes  and  is  the  cause  of  rainfall.  The  following 
are  among  the  questions  put  to  him  by  the  House  Committee 
of  1840.     The  Italics  are  his  own :  — 

Question  3292,  by  3fr.  Hume.  "  Will  you  state  what  pnrt  of  the 
currency  or  circulating  medium  affects  prices,  under  the  definitions 
which  you  have  now  given?"  —  "No  one  part  of  them  affects  the 
prices  of  commodities  more  than  any  of  the  other  parts." 

Question  3293,  by  Mr.  Grote.  "  Do  you  mean,  not  more  in  degree, 
or  not  in  any  different  Avay?"  —  "Not  more  in  degree." 

Question  3295,  by  3fr.  Hume.  "  Do  you  mean,  that  every  trans- 
action of  purchase  or  sale,  by  any  of  the  means  which  you  have 
mentioned  as  included  in  the  circulating  medium,  equally  affects 
prices?"  —  "Yes,  and  that  was  my  reason  for  caring  so  little  about 
making  a  distinction  among  them.  I  doubt  whether  they  operate 
upon  i^rices  at  all." 

Question  3296,  by  Mr.  Grote.  "  You  mean,  that  none  of  those 
items  which  you  have  enumerated  under  the  general  term  '  circu- 
lating medium'  have,  in  your  opinion,  any  effect  upon  prices?"  — 
"  Yes.     I  mean  that  they  are  not  operative  causes  of  prices." 

Question  3297,  by  3Ir.  Hume.    "  What  is  it,  then,  which  does 

1  The  crises,  similar  to  those  of  1847,  which  the  Bank  went  tlirougli  in  1857 
and  1866,  are  not  referred  to  here,  for  the  reason  that  an  examination  of  them 
would  add  notliing  to  our  knowledge  of  the  laws  of  money.  That  of  1847  has 
been  dwelt  upon  chiefly  for  the  purpose  of  illustrating  the  principles  laid  down 
in  the  first  part  of  this  work.  Any  further  illustration  of  them,  by  reference  to 
the  operations  of  the  Bank,  would  be  in  great  measure  superfluous. 


314  HISTORY   OP   MONETARY  THEORIES. 

affect  prices?"  —  "7%e  cost  of  production  limiting  the  supply  on 
the  one  hand,  and  the  pecuniary  means  of  the  consumer  limiting 
the  demand  on  the  otherP 

Question  3298.  "  Will  not  the  variation^  in  the  quantity  of  the 
circulating  medium  affect  prices  ?  "  —  "  No." 

Question  3299.  "  Will  it  not,  if  abundant,  be  more  at  the  disposal 
of  individuals  for  purchasers  than  when  it  is  scarce?"  —  "It  will 
be  more  easily  disposable  ;  but  it  will  not  be  necessarily  so  disposed 
of.  Ihelieve  that  the  amount  of  the  circulating  medium  is  the  effect, 
and  not  the  cause,  of  variations  iri  jyrices^ 

Question  3301,  by  Mr.  Warburton.  "  Supposing  the  quantity  of 
the  precious  metals  in  the  world  to  remain  constant,  and  that  in 
any  country  you  go  on  increasing  the  quantity  of  the  notes  payable 
on  demand,  will  the  prices  of  commodities  estimated  in  those  notes 
undergo  a  variation  proportionate  to  the  increase  of  the  notes  ?  "  — 
"  Not  if  the  notes  are  payable  in  gold,  on  demand,  unless  in  the 
degree  in  which  it  may  be  supposed  that  the  value  of  gold  is 
affected  in  the  commercial  world  by  an  extensive  substitution  of 
paper  for  gold  :  I  consider  that  those  points  were  distinctly  under- 
stood as  the  only  conditions  by  which  the  money  prices  of  commodi- 
ties were  likely  to  be  affected,  independently  of  the  circumstances 
affecting  the  articles  themselves." 

Question  3303.  "  Suppose,  as  before,  the  quantity  of  precious 
metals  in  the  world  to  remain  constant,  and  that  the  number  of 
deposits  in  banker's  hands  available  to  the  purchase  and  sale  of 
commodities  is  doubled,  trebled,  and  so  on,  will  the  prices  of  com- 
modities vary  in  proportion  to  that  increase  of  deposits  in  banker's 
hands?"  —  '■'- N'ot  in  the  slightest  degree.''^  ^ 

The  following  extracts  from  Mr.  James  Wilson's  "  Essay  on 
Capital,  Currency,  and  Banking,"  are  quoted  by  Mr.  Tooke 
approvingly,  as  fully  expressing  his  own  views:  — 

"  The  assumption  before  us  involves  two  questions  :  first,  expan- 
sion and  contraction  of  the  currency  at  pleasure ;  and,  second,  as 
the  consequence,  a  corresponding  action  on  prices.  Many  authors, 
in  treating  of  the  latter  as  a  consequence,  and  even  combating  its 
truth,  have  labored  under  great  difficulties,  by  proceeding  upon  the 
admission  of  the  former ;  but,  if  the  former  be  admitted,  we  con- 
fess we  cannot  imderstand  how  the  latter  can  be  denied  as  the 
legitimate  consequence.  If,  in  the  language  of  Mr.  Horner,  there  be 
any  means  by  which  'the  quantity  of  circulating  medium  (being 
convertible  paper  and  coin)  can  be  permanently  augmented,  without 
a  corresponding  augmentation  of  internal  trade,  a  rise  will  unavoid- 
ably take  place  in  the  price  of  exchangeable  commodities.'  Such 
means,  as  we  have  already  seen,  do  exist  in  the  case  of  an  incon- 
vertible currency;  but  the  rise  in  price  in  consequence  is  only 
nominal  in  that  case,  being   immediately  compensated   to  other 

1  History  of  Prices,  vol.  iv.  p.  461  et  seq. 


THOMAS  TOOKE.  315 

countries  by  a  fall  in  the  exchange.  But  with  a  convertible  cur- 
rency, if  such  77ieans  exist  at  all.,  the  rise  in  price  would  not  be 
nominal,  but  real ;  as  it  would  be  expressed  either  in  coin,  or  notes 
convertible  into  coin,  and,  therefore,  would  not,  as  in  the  other  case, 
be  comijensated  by  any  fall  in  the  exchange.  But  this  fact  shows 
at  once  the  impossibility  of  the  '■augmentation''  alluded  to  in  the 
premises,  when  the  currency  is  convertible.  A  currency  '  augmented 
without  any  corresponding  augmentation  of  the  internal  trade,'  im- 
plies a  quantity  of  notes  I'etained  in  circulation,  at  the  will  of  the 
issuers,  which  the  public  do  not  require.  Now,  the  public  do  not 
receive  notes  from  a  banker  without  paying  interest  for  their  use  ; 
and,  however  low  that  may  be,  they  will  take  no  more  than  they 
absolutely  require;  nor  do  they  retain  notes  in  their  possession 
beyond  what  the  convenience  of  trade  requires ;  and,  therefore,  if 
issued  in  excess  of  that  quantity,  and  if  convertible,  a  portion  would 
be  instantly  returned  upon  the  issuers.  Nor  can  we  conceive  any 
means  whatever  by  which  the  circulation  could  be  so  augmented  ; 
and  we  have  deeply  to  regret  that,  although  such  a  power  on  the  part 
of  Banks  has  been  taken  for  granted  by  most  of  the  writers  during 
the  last  twelve  years,  no  one  has  yet  attempted  to  explain  by  what 
process  it  could  be  accomplished ;  and  we  are  compelled  to  think 
that  impressions  which  gained  ground  many  years  since  as  applica- 
ble to  an  inconvertible  currency  have  been  inadvertently  associated 
also  with  a  convertible  currency. 

"  The  impossibility  of  increasing  the  quantity  of  paper  in  circu- 
lation (when  convertible),  except  as  the  effect  of  a  corresponding 
increase  of  an  internal  trade,  or  of  any  depreciation  in  its  value  tak- 
ing place,  will  be  more  evident  when  it  is  considered  by  what  process 
an  inconvertible  currency  becomes  depreciated.  On  all  hands  it  is 
admitted,  that,  as  long  as  inconvertible  paper  is  not  issued  in  excess, 
as  long  as  coin  continues  freely  to  circulate  with  it,  the  paper  will 
not  become  depreciated  ;  but  as  soon  as  the  paper  is  issued  in  excess, 
and  the  coin  is  pressed  out  of  circulation,  it  becomes  depreciated, 
and  the  prices  of  commodities  rise  in  consequence ;  though  it  is  only 
a  nominal  rise,  which  would  be  better  expressed  by  depreciation  of 
the  circulation.  Now,  how  does  this  depreciation  and  rise  of  price 
take  place  ?  During  tlie  early  issue  of  the  French  assignats,  no  de- 
preciation or  rise  in  price  of  commodities  took  place  until  the  coin 
was  pressed  out  of  circulation  ;  because,  as  the  paper  was  issued,  the 
tendency  to  a  redundant  currency  was  constantly  corrected  by  the 
withdrawal  of  silver,  which,  being  a  commodity  having  a  general 
value  in  the  markets  of  the  world,  could  be  exported  or  taken  for 
the  general  uses  of  the  cambist  or  the  silversmith.  But  as  soon  as 
silver  was  exhausted  from  the  circulation,  the  issue  of  assignats  still 
continuing,  and  the  same  quantity  of  internal  exchanges  only  re- 
maining, the  currency  became  redundant ;  there  being  no  means  of 
absorption  except  in  the  existing  quantities  of  commodities.^ 

"  Money  "  (says  Tooke,  on  a  preceding  page)  '-has  two  functions  : 
the  one,  that  of  serving  as  an  instrument  of  exchange ;  the  other, 

1  History  of  Prices,  vol.  iv.  pp.  194-196. 


816  HISTORY   OF   MONETAPvY    THEORIES. 

that  of  being  the  subject  of  contracts  for  future  payment.  It  is  in 
the  latter  capacity  that  the  fixity  of  a  standard  is  the  most  essen- 
tial. As  a  mere  "instrument  or  medium  of  exchange,  at  the  same 
time  and  in  the  same  place,  invariableness  of  value,  though  desira- 
ble, is  not  of  so  much  importance ;  the  immediate  purpose  of  money  in 
this  capacity  being  to  serve  as  a  point,  or  rather  a  scale,  of  comparison 
more  convenient  than  actual  barter  between  any  two  commodities 
or  sets  of  commodities.  It  is  in  the  latter  capacity,  that  is  to  say, 
as  the  subject  of  engagements  or  obligations  for  future  payment, 
that,  in  every  view  of  justice  and  policy,  the  specific  thing  prom- 
ised, in  quantity  and  quality,  should  be  paid  at  the  expiration  of  the 
term."  ^ 

The  sum  of  all  this  is,  that  convertible  paper  money  cannot 
affect  prices  under  any  conditions.  So  far  Tooke  simply  fol- 
lows Adam  Smith,  that  "  the  amount  of  paper  money  of  every 
kind  that  can  circulate  in  a  nation  can  only  equal  the  amount 
of  coin  which  would  otherwise  have  been  in  circulation.  All 
excess  of  issue  would  immediately  return  upon  the  Bank  for 
coin.  As  its  holders  can  make  no  use  of  such  excess,  they  will 
immediately  convert  it  into  a  form  in  which,  by  its  exportation, 
they  can  use  it."  Such  was  Tooke's  argument.  If  there  could 
be  no  excess,  then  a  convertible  paper  money  could  not  affect 
prices.  Neither  could  a  government  inconvertible  paper  cur- 
rency affect  prices,  so  long  as  it  was  not  in  exoess  of  the  wants 
of  those  using  it  in  their  exchanges.  It  became  depreciated 
only  for  the  reason  that  it  was  in  excess  of  a  cm-rency  of 
coin.  Value  was  no  necessary  attribute  of  it.  It  might  be  a  con- 
venient attribute  :  that  is,  if  a  person  parted  with  merchandise, 
to  be  paid  for  in  six  months,  it  would  be  well  that  that  in  which 
he  was  to  be  paid  should  have  a  uniform  value ;  but  where 
the  transaction  was  to  be  immediately  closed,  that  is,  where  a 
person  sold  a  barrel  of  flour  for  the  purpose  of  purchasing  with 
the  proceeds  a  hat  or  a  coat,  the  value  of  the  medium  to  such 
person,  says  Tooke,  would  be  unimportant.  But  would  it  be 
unimportant  to  the  seller  of  the  coat  or  hat  ?  He  might  wish 
to  hold  the  proceeds  in  reserve  for  future  itse ;  or  suppose  he 
wished  immediately  to  purchase  something,  must  he  not  be 
prepared  to  offer  that  which  could  be  held  in  reserve  for  any 
length  of  time,  its  value  remaining  unchanged.  Whatever  is 
to  serve  as  money,  in  the  last  resort,  must  always  possess  uni- 
formity of  value,  not  only  for  months  and  years,  but  for  ages. 

1  History  of  Prices,  vol.  iv.  pp.  145-146. 


THOMAS    TOOKE.  317 

The  fallacy  of  Tooke's  distinction  ought  to  be  palpable  to  the 
dullest  apprehension.  Yet  he  drags  the  reader  through  six 
volumes,  one  of  them  containing  nearly  a  thousand  pages,  — 
the  greater  portion  of  them  all  devoted  to  the  task  of  proving 
this,  and  propositions,  if  possible  still  more  absurd.  So  with 
prices :  these  with  him  depend  upon  cost,  and  the  ability,  not 
the  will,  of  the  public  to  consume.  The  public  are  able  to  con- 
sume a  thousand  things  they  will  not.  At  one  time  they  will 
not  purchase  a  particular  style  of  goods,  which  is  all  the  rage 
at  another,  although  it  would  be  twice  as  valuable,  as  far  as 
its  wear  is  concerned,  as  that  which  they  will  purchase.  Had 
Tooke  understood  the  laws  and  effects  of  paper  mone3%  he 
would  have  seen  that  it  is  possible  for  prices  to  fall  enormously, 
even  when  it  is  greatly  inflated.  The  effect  of  an  inflation  is 
to  advance  prices,  from  an  increase  of  the  instruments  of  ex- 
penditure, and  from  its  tendency  to  excite  speculation,  wliich 
may  be  carried  to  such  a  pitch  as  to  seize  and  attempt  to  hold 
all  the  food,  for  example,  upon  the  market.  In  such  case,  it 
not  unfrequently  happens  that  the  public  can  be  supplied 
from  other  sources,  or  that,  from  the  excessive  rates  charged 
by  holders,  consumption  will  be  so  much  reduced  that  those 
who  attempted  to  control  prices  find  themselves  unable  to 
carry  their  purchases,  and  are  forced  to  throw  them  upon  the 
market ;  in  consequence  of  which,  prices  may  for  a  time  be  far 
below  what  they  would  have  been  under  a  metallic  currency. 
Such  fluctuations,  which  are  constantly  occurring,  or  were 
occurring  during  the  suspension  of  the  Bank,  —  a  period  from 
wliich  he  drew  the  greater  part  of  his  illustrations,  —  have  been 
assumed  by  Mr.  Tooke  to  prove  prices  to  be  wholly  indepen- 
dent of  the  quantity  of  the  circulating  medium.  He  might  as 
well  have  attempted  to  prove  that  indulgence  in  liquor  had  no 
tendency  to  elevate  one,  from  the  exhaustion  or  syncope  result- 
ins;  from  its  excessive  use.  So,  under  an  inflation  of  the  cur- 
rency,  prices  may  fall  in  much  greater  ratio  than  the  inflation, 
from  the  decreased  cost  of  production,  or  from  the  falling  off, 
from  any  cause,  of  the  demand.  None  of  these  causes  or 
influences  were  properly  considered  by  him.  He  sought  to 
erect  a  science  from  an  observation  of  certain  phenomena,  with- 
out sufficient  reference  to  their  cause  or  law.  It  is  as  useless, 
however,  to  attempt  to  reason  with  him  as  it  was  with  the 
philosopher  in  the  tale  of  "  Rasselas."     It  was,  probably,  from 


318  HISTORY  OF  MONETARY  THEORIES. 

an  examination  or  an  attempted  examination  of  his  works,  that 
Mr.  Gladstone  declared  the  study  of  money  to  be  a  fruitful 
cause  of  insanity. 

An  authority  far  greater  than  Tooke,  and  whose  works  may, 
indeed,  be  said  to  epitomize  all  that  is  known  or  held  at  the 
present  time  upon  this  subject,  is  Mr.  J.  R.  McCulloch,  late 
Professor  of  Political  Economy  in  the  University  of  London, 
author  of  the  "  Cyclopaedia  of  Commerce,"  of  a  "  Statistical 
Account  of  the  British  Empire,"  of  the  "  Principles  of  Politi- 
cal Economy,"  and  of  numerous  other  works  on  kindred  sub- 
jects. He  also  edited  the  works  of  his  great  master,  Adam 
Smith,  to  which  he  added  elaborate  notes  of  his  own ;  the 
works  of  Lord  Overstone,  of  David  Ricardo,  and  of  other 
lesser  lights  of  the  modern  school.  No  one  in  his  particular 
province  ever  covered  so  broad  a  field ;  no  one  was  ever  so 
familiar  with  the  Economists ;  and  no  one  ever  so  completely 
epitomized  their  speculations  and  views.  He  was,  among 
them,  eminently  omnium  hominum  facile  princeps.  Fully 
accepting  the  doctrines  of  Smith,  and  the  wide  distinction 
which  he  made  between  the  qualities  of  the  precious  metals 
which  fit  them  for  money  and  those  which  determine  their 
value  in  exchange,  he  proceeds  to  consider  the  laws  by  which 
their  value  is  determined  when  their  movement  is  perfectly  free  ; 
and  those  by  which  they  are  affected  when  artificial  restraint 
is  imposed  upon  it :  — 

"It  appears  that  when  gold  and  silver  are  produced  under  a  sys- 
tem of  free  competition,  their  value  depends,  like  that  of  all  other 
commodities,  on  the  cost  of  their  production.  While  they  form  the 
currency  of  the  commercial  world,  the  price  of  commodities,  or 
their  value  estimated  in  money,  will  consequently  vary  not  only 
according  to  the  variation  in  the  cost,  demand,  and  supply  of  com- 
modities, bvit  also  according  to  the  variations  in  the  cost  of  the  gold 
and  silver  with  Avhich  they  are  compared.  .  .  . 

"  We  now  come  to  the  second  branch  of  our  inquii-y,  or  that 
which  has  for  its  object  to  discover  the  laws  which  regulate  the 
value  of  gold  and  silver,  when  the  power  to  supply  them  is  placed 
under  a  restraint.  It  is  obvious,  supposing  competition  were  not 
allowed  to  operate  in  the  production  of  the  precious  metals,  that 
their  value  would  no  longer  depend  on  the  principles  previously 
laid  down.  Whenever  the  supply  of  money  is  limited,  its  value 
varies  in  inverse  ratio  to  its  quantity  as  compared  with  the  quantity 
of  commodities  brought  to  market,  or  with  the  business  it  has  to 
perform.     If,  on  one  hand,  double  the  usual  supply  of  commodities 


J.  R.  M'cinxocH.  319 

were  brought  to  market  with  a  limited  currency,  tlieir  money  price 
woulil  be  reduced  a  half ;  and  if,  on  the  other  hand,  only  half  the 
usual  supply  of  commodities  were  broiight  to  market,  their  price 
would  be  doubled ;  and  this,  whether  the  cost  of  their  production 
was  increased  or  diminished.  Sovereigns,  shillings,  livres,  dol- 
lars, &c.,  would  then  really  constitute  mere  tickets  or  counters,  to 
be  used  in  computing  the  value  of  property,  and  in  transferring  it 
from  one  individual  to  another.  And,  as  small  tickets  or  counters 
would  serve  for  that  purpose  quite  as  well  as  large  ones,  it  is  un- 
questionably true  that  a  debased  currency  may,  by  first  reducing, 
and  then  limiting  its  quantity,  be  made  to  circulate  at  the  value  it 
Avonld  bear  were  the  power  to  supply  it  unrestricted,  and  were  it  of 
the  legal  weight  and  fineness;  and, by  still  further  limiting  its  quan- 
tity, it  may  be  made  to  pass  at  any  higher  value.  It  appears,  there- 
fore, that  whatever  be  the  matter  of  which  money  is  made,  and 
however  destitute  of  intrinsic  value,  it  is  yet  possible,  by  suffi- 
ciently limiting  its  quantity,  to  raise  its  value  to  any  conceivable 
extent.  .  .  .  Assume  the  currency  of  Great  Britain  to  consist  of 
fifty  or  sixty  millions  of  sovereigns ;  suppose  now  that  government 
withdraws  them,  and  supplies  their  place  with  fifty  or  sixty  millions 
of  half  sovereigns,  and  that  the  issue  of  additional  coins  and  of 
paper  money  is  effectually  prevented ;  in  this  case  it  is  plain, 
should  the  same  quantity  of  commodities  be  brought  to  market, 
there  would  be  the  same  number  of  coins  to  exchange  against  them. 
There  would  not,  therefore,  unless  the  supply  of  commodities 
varied,  be  any  change  in  their  price.  The  hat  that  had  previously 
sold  for  a  gold  coin  would  still  sell  for  one.  It  is  true  that  the 
coin  for  which  it  now  sells  is  only  half  the  intrinsic  value  of  the 
one  previously  in  circulation ;  but  this  deficiency  has  been  fully 
compensated  by  the  artificial  value  given  to  it  by  the  monopoly. 
The  country  has  a  certain  number  of  exchanges  to  perform ;  and  it 
is  quite  obvious,  that,  were  the  currency  which  is  to  perform  them 
sufficiently  limited,  a  shilling  or  a  sixpence  might  be  made  to  do 
the  business,  or  to  pass  at  the  value  of  a  sovereign. 

"  These  are  principles  of  the  greatest  importance  to  a  right 
understanding  of  the  real  nature  of  money.  In  inquiring  into  the 
circumstances  on  which  its  value  depends,  we  must  always  ascer- 
tain, in  the  first  place,  whether  it  be  free  or  monopolized.  Down 
to  a  recent  period,  it  was  universally  maintained  that  the  value  of 
money  depended  entirely  on  the  relation  between  its  amount  and 
the  demand.  But  this  is  true  only  of  a  gold  and  silver  currency 
when  its  quantity  is  limited;  and  of  a  currency  formed  of  materials 
having  little  intrinsic  worth,  when  its  quantity  is  limited,  and  it  is  not 
convertible,  at  the  pleasure  of  the  holder,  into  some  more  valuable 
commodity.  It  is  obvious,  indeed,  without  any  reasoning  on  the 
subject,  that  the  value  of  a  currency  consisting  of  inconvertible 
paper,  or  of  any  other  very  cheap  material,  must  depend  on  the 
proportion  which  its  amount  bears  to  the  commodities  brought  to 
market,  or  to  the  demand  ;  and  wherever  a  currency  of  this  kind, 
or  a  limited  gold  currency,  is  in  circulation,  the  common  opinion 
that  the  price  of  commodities  depends  wholly  on  the  proportion 


320  HISTOEY   OF  MONETARY  THEORIES. 

between  them  and  the  supply  of  money  is  quite  correct.  But  it  is 
altogether  different  with  a  freely  supplied  currency  consisting  of 
gold  and  silver,  or  of  any  article  possessed  of  considerable  value. 
The  fluctuations  in  the  supply  and  demand  of  such  currency  have 
no  permanent  influence  over  its  value.  This  is  determined  by  the 
cost  of  its  production.  If  a  sovereign  commonly  exchange  for  a 
couple  of  bushels  of  wheat  or  a  hat,  it  is  because  its  production 
has  cost  as  much  as  either  of  these  commodities  ;  while,  if  with  a 
limited  and  inconvertible  paper  money,  the  latter  is  exchanged  for 
a  one  pound  note,  it  is  because  such  is  the  proportion  which,  as  a 
part  of  the  mass  of  commodities  offered  for  sale,  they  bear  to  the 
suj^ply  of  paper  or  money  in  the  market.  This  proportion  would, 
it  is  evident,  be  not  only  immediately,  but  permanently,  aiFected 
by  an  increase  or  diminution  of  the  supply  of  paper  or  of  commodi- 
ties ;  but  the  relations  which  commodities  bear  to  a  freely  supplied 
metallic  currency  cannot  be  changed,  except  by  a  change  in  the 
cost  of  producing  the  commodities.  Such  are  the  circumstances 
which  determine  the  value  of  money,  both  when  the  power  to  sup- 
ply it  is  not  subjected  to  any  species  of  control,  and  when  it  is 
controlled  and  limited.  In  the  former  case,  its  value  depends,  like 
that  of  most  other  things,  on  the  cost  of  its  production  ;  while,  in 
the  latter  case,  its  value  is  totally  unaflTected  by  that  circumstance, 
and  depends  on  the  extent  to  Avhich  it  has  been  issued  compared 
with  the  demand."  ^ 

Mr.  McCulloch  might  as  well  have  assumed  a  particular 
county  of  England  to  be  fenced  off  by  a  wall  so  high  that  only 
a  small  amount  of  vital  air  could  get  into  it ;  and  that,  in  sucli 
case,  the  right  to  breathe  would  sell  at  an  enormous  price  ;  and 
have  inferred,  therefrom,  that,  should  the  amount  of  money  be 
limited,  its  price  would  rise  in  like  ratio.  One  illustration  is 
as  pertinent,  or  rather  as  impertinent,  as  the  other.  Whoever 
gets  gold,  gets  it  to  spend.  There  may  be  quarrels  between 
those  who  dig  and  those  who  rule  as  to  who  shall  enjoy  the 
product ;  but,  whatever  the  result,  it  would  immediately  go 
into  circulation.  Such  will  be  the  law  so  long  as  mankind 
must  be  fed  and  clothed,  or  will  waste  its  means  in  pageants 
and  wars.  In  his  "  Political  Economy  "  and  other  works  his 
great  theme  always  was  the  impossibility  that  government 
should  control  the  movement  of  the  precious  metals,  and  conse- 
quently, the  utter  folly  of  attempting  to  do  so.  They  obey  a  law 
far  higher  than  that  of  human  provision.  His  illustrations, 
however,  are  in  keeping  with  those  of  the  school  to  which  he 
belonged,  which  is  always  assuming  impossible  instances  as  a 

I  Notes  to  Smith's  Wealth  of  Nations,  pp.  482,  483. 


J.    R.   M'CULLOCH.  321 

means  of  setting  forth  its  conclusions  and  beliefs.  It  is  the 
•way  of  children,  not  the  method  of  men  of  full  stature. 
Neither  the  production  nor  possession  of  the  precious  metals 
can  be  monopohzed.  Their  value  everywhere,  under  all  con- 
ditions (allowing  for  the  influence  of  accidental  circumstances), 
is  measured  by  their  cost.  Every  one  can,  at  all  times,  possess 
himself  of  them  to  any  extent,  on  the  condition  only  of  paying 
their  price.  No  rule  or  law  is  more  universally  recognized 
than  this  ;  yet,  from  conditions  declared  by  Mr.  McCulloch 
himself  to  be  utterly  impossible,  he,  with  the  Economists, 
deduces  an  inexorable  law,  —  and  attempts  to  prove  that,  if  a 
sixpence  could  be  cut  into  a  sufficient  number  of  pieces,  it 
would  suffice  for  the  exchanges  of  the  world,  —  not  from  its 
intrinsic  value,  for  Mr.  McCulloch  assumes  that  this  would  not 
be  affected  by  the  restraint  to  be  imposed  upon  it ;  —  and  that, 
consequently,  the  most  worthless  thing  serving  as  money  might, 
by  a  similar  restraint  or  limitation  upon  its  quantity,  be  raised 
to  the  highest  possible  pitch  of  value. 

All  this  is  but  the  repetition  of  the  argument  of  Lowndes  at 
the  period  of  recoinage  in  1696  ;  which  Locke,  at  the  request 
of  the  government,  was  at  such  pains  to  refute.  Such  repetition 
is  all  the  more  wonderful  for  the  reason,  that  the  experience 
of  1696  conveyed  a  lesson  as  conclusive  as  Locke's  dem- 
onstration. All  the  conditions  assumed  by  Mr.  McCulloch 
and  the  Economists  for  raising  debased  money  to  any  con- 
ceivable pitch  of  value,  then  met,  from  causes  which  far  ti-an- 
scended  human  power.  The  proof,  if  ever  to  be  made,  was  to 
be  made  then.  For  a  time,  the  amount  of  coin  in  circulation, 
or  currency  of  all  kinds,  equalled  hardly  a  tithe  of  that  re- 
quired for  the  exchanges  of  the  country.  These,  for  a  consid- 
erable period,  had  to  be  made  by  means  of  credit  or  barter. 
Yet  the  necessity  which  then  existed  for  a  "  circulating 
medium  "  did  not  exert  the  slightest  influence  in  raising  the 
value  of  the  debased  coins.  The  value  of  each  was  measured 
by  the  cost  of  the  metal  that  each  contained.  Had  their  value 
risen  greatly  above  their  cost,  supplies  would  immediately  have 
flowed  in  from  other  countries.  If  tickets  or  counters  were 
all  that  were  wanted,  these  could  easily  have  been  provided, 
as  McCulloch  suggests,  by  cutting  the  pieces  in  circulation  into 
a  sufficient  number  of  parts.  It  was  capital,  not  counters,  that 
was  wanted,  and  relief  came  only  when  that  was  supplied. 

21 


322  HISTORY   OF   MONETARY  THEORIES. 

But  even  admitting  that,  by  reducing  the  amount  of  metal  in 
coins,  their  value  might  be  maintained  from  the  necessity  of 
their  use,  there  was  still  an  important  link  wanting  to  connect 
his  premise  with  his  conclusion.  Gold  gets  into  circulation 
by  means  of  its  value.  It  circulates  at  its  value.  If  its  amount 
were  permanently  decreased,  its  value  would  increase.  This 
is  palpable  enough;  but  how  is  that  which  is  valueless  in 
itself  to  get  into  the  category  of  values  ?  It  is  easy  to  see 
that  the  value  of  a  handful  of  sand  circulating  as  money 
would  increase  as  its  quantity  was  decreased.  But  how  was 
it,  in  the  first  place,  to  get  into  circulation  ?  From  the  neces- 
sity, says  McCulloch,  of  some  medium  of  exchange,  and  from 
the  agreement  of  mankind  that  sand  should  be  such  medium. 
After  what  has  preceded,  it  is  useless  to  reply  to  such  assump- 
tions as  these.  They  are  the  dreams  or  vagaries  of  persons 
bereft  of  all  sense  in  reference  to  the  subjects  to  which  they 
relate,  and  who,  unfortunately,  are  wholly  impervious  to 
reason. 

Again :  — 

"  In  the  first  part  of  this  note  we  endeavored  to  show,  in  the 
first  place,  that,  when  the  power  to  supply  money  is  not  restricted, 
its  value  depends,  like  that  of  most  other  commodities,  entirely  on 
the  cost  of  its  production  ;  and  that,  in  the  second  place,  or  when 
the  power  to  supply  money  is  monopolized,  its  value  does  not 
depend  on  the  cost  of  its  production ;  but  on  the  quantity  in  circu- 
lation compared  with  the  demand.  .  .  . 

"  It  may  be  worth  while,  perhaps,  to  observe  that  neither  the 
existence  nor  the  want  of  confidence  in  the  solvency  of  the  issuers 
exercises  the  smallest  influence  over  the  value  of  paper  money, 
properly  so  called.  Notes  not  legal  tender,  and  payable  on  demand, 
or  at  some  stipulated  period,  are  not  paper  money,  though  they 
serve  the  same  purposes  during  the  time  they  continue  to  circulate. 
The  value  of  such  notes  is  wholly  derived  from  the  confidence 
placed  in  the  ability  of  the  issuers  to  retire  them  when  presented 
for  payment,  or  when  they  become  due.  Whenever,  therefore, 
this  confidence  ceases,  their  circulation  necessarily  ceases  also.  But 
no  such  circumstances  afiect  paper  money ;  meaning  by  paper 
money,  paper  made  legal  tender,  and  not  legally  convertible  into 
gold,  or  any  thing  else,  at  the  pleasure  of  the  holders,  or  at  any 
given  period.  No  part,  whatever,  of  the  value  of  paper  money  is 
derived  from  such  confidence.  It  circulates  because  it  is  made 
legal  tender,  and  because  the  use  of  a  circulating  medium  is  indis- 
pensable ;  and  its  value,  supposing  the  demand  to  be  constant,  is, 
in  all  cases,  precisely  as  the  quantity  in  circulation.  .  .  . 

"  It  would  not  be  difiicult  for  the  issuers  of  inconvertible  paper, 


J.   E.   M'CULLOCH.  323 

were  they  so  disposed,  to  preserve  its  value  on  a  par  with  that  of 
gold  or  silver.  Suppose,  for  example,  that  there  are  no  gold  coins  in 
circulation  in  Great  Britain,  and  that  our  currency  consists  wholly 
of  inconvertible  paper  issued  by  government,  or  by  a  board  acting 
under  its  orders ;  under  these  circumstances,  it  is  quite  plain  that 
no  gold  would  be  imported,  either  to  be  used  as  money  or  to  be 
kept  as  reserves  in  the  coffers  of  the  bankers.  But  the  demand  for 
it  in  the  arts  would,  notwithstanding,  cause  it  to  be  imported  in 
large  quantities ;  and  it  might  still  be  made  a  standard  by  which 
to  regulate  the  issues  of  paper.  Thus,  when  the  holders  of  £3|-J§ 
(£3  i75.  10-k?-)  of  paper  could  readily  exchange  it  for  one  ounce 
of  gold  bullion  of  22  carats  fine,  it  would  be  a  proof  that  it  was 
exactly  of  the  same  value  as  gold,  and  that,  consequently,  its  quan- 
tity should  neither  be  increased  nor  diminished.  But  if  more  or 
fewer  than  £3^|§  in  paper  were  required  to  buy  an  ounce  of  bullion, 
it  would  show,  in  the  one  case,  that  the  value  of  paper  had  fallen 
too  low,  and  that  its  quantity  should  be  lessened  ;  and,  in  the  other, 
that  its  value  had  risen  too  high,  and  that  its  quantity  should  be  in- 
creased. By  acting  in  this  way,  or,  which  is  substantially  the  same 
thing,  by  attending  to  the  exchanges,  and  lessening  the  supply  of 
currency  when  they  begin  to  fall,  and  increasing  it  when  they  begin 
to  rise,  the  value  of  paper  money  might  be  kept  very  nearly  on  a 
level  with  the  value  of  the  metallic  money  that  would  circulate  in  its 
stead  were  it  withdrawn.  This  conduct  is  that,  in  fact,  of  every 
prudent  banker  obliged  to  pay  his  notes  on  demand.  He  does 
not  defer  narrowing  "his  issues  until  a  heavy  drain  for  bullion  has 
set  upon  his  coffers,  but  sets  about  their  contraction  the  moment 
he  obsers' es  the  price  of  bullion  rising,  and  the  exchanges  falling ; 
enlar<Ting  them  under  the  opposite  circumstances.  The  obligation 
to  pay  in  bullion  compels  attention  to  be  paid  to  principles  that 
raio-ht  otherwise  be  contemned ;  but  that  is  all,  and  hence  it  fol- 
lows, that,  if  sufficient  security  could  be  obtained  that  the  power 
to  issue  inconvertible  paper  would  not  be  abused,  and  that  its 
amount  would  be  enlarged  and  diminished  so  as  to  preserve  its 
value  on  a  par  with  gold,  the  latter  might  be  entirely  dispensed 
with  for  all  pecuniary  purposes,  except  as  a  standard,  though  it 
mio-ht  still  be  expedient  to  use  a  subsidiary  silver  and  copper  cur- 
rency, as  at  present,  for  small   payments."^ 

It  is  very  true,  that,  if  £3i|f  of  paper  would  exchange  for 
one  ounce  of  gold,  twenty-two  carats  fine,  the  value  of  one 
would  equal  that  of  the  other.  But  was  not  Mr.  McCulloch 
a  little  hasty  in  assuming  an  inconvertible  government  note 
of  the  nominal  value  of  an  ounce  of  gold,  to  be  of  equal 
value,  and  exchangeable  therefor  ?  It  is  to  be  remembered, 
that  it  was  not  necessary  that  any  provision  should  be  made 
for  its  payment,  or  even  that  it  should  ever  become  due.     It 

1  Notes  to  Smith's  Wealth  of  Nations,  pp.  489-491. 


324  HISTORY  OF   MONETARY  THEORIES. 

circulated,  not  from  any  value  it  possessed,  but  from  the 
necessity  for  its  use  as  a  ticket  or  counter  of  exchange. 
Neither  was  it  necessary  that  it  should  be  made  legal  tender. 
Suppose  government  to  set  up  a  board  for  the  issue  of  incon- 
vertible notes.  How  are  these  to  be  issued  ?  Would  any  thing 
be  paid  to  the  board  on  their  issue  ?  If  not,  then  there  would 
be  likely  to  be  no  little  scramble  for  them  ;  as  they  would  be 
worth  a  struggle,  so  long  as  they  would  sell  in  the  market 
at  one-half  per  cent  of  their  nominal  value.  If  any  thing 
were  to  be  paid,  how  much  ?  If  fifty  per  cent  of  their  nominal 
value,  then  those  who  received  them  would  sell  them  at  a 
trifling  advance  for  the  profit  to  be  made.  They  would  only, 
however,  command  their  value ;  for  no  one  would  pay  more 
when  he  could  get  them  himself  by  application  to  the  board. 
They  would  sell,  therefore,  only  at  their  worth  or  cost.  How 
was  any  excess  issued  to  be  taken  in?  By  paying  out,  of 
course,  a  corresponding  amount  of  coin.  The  board,  then,  must 
start  with  some  provision  therefor.  Such  provision,  in  order 
to  secure  that  degree  of  confidence  necessary  to  cause  them  to 
circulate  as  currency,  must,  in  some  form,  equal  their  whole 
value.  They  would  be  subject  to  the  same  laws  as  all  other 
kinds  of  currency.  Who  is  to  supply  such  provision  ?  Those, 
of  course,  who  receive  the  notes.  Those  who  derive  no  ad- 
vantage therefrom  are  not  to  stand  in  the  gap.  If  those  to 
whom  the  notes  were  paid  could  only  get  their  value  or  cost 
in  exchange,  their  nominal  would  be  made  to  express  their  real 
value,  if  only  as  a  matter  of  convenience.  If  the  process  be 
traced,  it  will  be  seen  that  notes  can  get  into  circulation  as 
money,  only  in  the  manner  in  which  they  do  get  into  circula- 
tion, and  that  the  inconvertible  ones  of  Mr.  McCulloch  (for 
the  notes  supposed  by  him  were  not  to  be  legal  tender)  could 
not  get  into  circulation  at  all.  It  is  certainly  useless  to  repeat 
his  folly  by  replying  to  assertions  which  the  briefest  examina- 
tion shows  to  be  wliolly  gratuitous  and  false. 

Again :  — 

"But,  notwithstanding  the  economy  of  money,  and  the  saving 
of  risk  and  trouble  resulting  from  the  use  of  bills  of  exchange  and 
Banks  of  deposit,  there  is  still  a  very  heavy  expense  attendant 
upon  the  emplojTiient  of  the  precious  metals  as  currency.  The 
impossibility  of  employing  bills  of  exchange  in  the  settlement  of 
the  great  majority  of  transactions  renders  the  employment  of  a 


J.    R.    M'CULLOCH.  325 

large  quantity  of  money  indispensable  ;  while  the  State  loses  the 
whole  value  of  the  bullion  or  capital  that  is  locked  up  in  the  coffers 
of  the  deposit  Banks.  Should,  therefore,  means  be  devised  for 
fabricating  that  portion  of  the  currency  required  for  the  settlement 
of  such  transactions  as  cannot  be  adjusted  by  bills  of  exchange,  of 
some  material  having  little  real  value,  the  cost  of  its  maintenance 
would  be  proportionally  diminished  ;  and  the  bullion  in  the  coffers  of 
the  deposit  Banks  would  be  disengaged  for  other  purposes.  Of  the 
materials  suggested  for  this  purpose,  paper  has  been  by  far  the  most 
generally  resorted  to,  and  is  in  every  respect"  the  most  eligible.  By 
using  paper  instead  of  gold,  we  substitute  the  cheapest  in  room  of 
the  most  expensive  currency  ;  and  enable  the  society,  without  loss 
to  any  individual,  to  send  abroad  all  the  coins  rendered  superfluous 
by  the  use  of  paper,  getting  in  return  from  the  foreigner  an  equiv- 
alent in  raw  materials  or  manufactured  goods."  ^ 

McCullocli  objects  to  the  use  of  coin  as  money,  from  its  ex- 
cessive cost.  It  is  to  be  supplemented,  in  consequence,  by  paper. 
Still,  to  render  this  paper  convertible  into  coin  or  its  equiva- 
lent, considerable  sums  of  the  latter  have  to  be  maintained. 
Such  a  system,  he  says,  is  very  imperfect.  To  render  it  per- 
fect, the  reserves  of  coin  now  held  should  be  supplied  by  some 
material  costing  nothing.  The  whole  amount  of  the  precious 
metals  in  the  country  might  then  be  sent  out  of  it,  in  exchange 
for  useful  merchandise  or  machinery.  The  monetary  millen- 
nium would  then  dawn  on  the  world.  But  what  does  every  one 
seek  in  exchanging  that  which  he  possesses  ?  To  better  his 
condition  ;  to  get  something  which  will  be  more  valuable  to 
him  than  that  with  which  he  parts  ;  in  order  to  have  that 
which,  when  he  wishes  to  use  it,  will  bring  to  him  the  greatest 
possible  amount  of  values  in  other  forms.  Gold  and  silver, 
therefore,  are  always  demanded  in  exchange,  for  the  reason 
that  they  are  values  in  their  highest  forms.  The  whole  effort 
of  mankind  is  to  convert  its  industries  and  products  into  such 
values,  or  into  that  which  shall  produce  them ;  and  which,  till 
its  possession  be  demanded,  is  drawing  interest  in  kind  for  the 
benefit  of  the  party  entitled  to  it.  The  whole  effort  of  nature 
is  in  the  same  direction,  —  to  convert  lesser  into  greater  val- 
ues. McCulloch  and  the  Economists  would  invert  all  this 
order,  by  converting  whatever  a  person  has  to  sell,  not  into 
the  most  valuable,  but  into  the  least  valuable  form.  Could 
they  have  their  way,  six  months  would   suffice  for  them  to 

1  Notes  to  Smith's  "Wealth  of  Nations,  pp.  487,  488. 


326  HISTORY   OF   MONETARY   THEORIES. 

point  out   the  "  last   man ; "  for  they  are  pests  which  seem 
likely  to  survive  to  witness  the  final  doom. 

McCulloch  fully  sustained  the  policy  of  Sir  Robert  Peel  in 
the  Act  of  1844,  on  the  ground  that  the  whole  currency  should 
vary  in  amount  and  value  exactly  as  a  metallic  currency  would 
do  were  the  paper  currency  withdrawn  and  coin  substituted 
in  its  place.  In  order  to  a  perfect  currency,  he  would,  in  an- 
other place,  have  it  consist  of  a  material  wholly  costless  in 
itself,  the  value  of  which  was  to  be  derived  wholly  from  its 
use  in  the  exchanges.  He  re-enforced  his  argument  in  favor 
of  restriction  upon  the  issues  of  paper  by  the  following  refer- 
ence to  the  system  of  the  United  States :  — 

"  If  the  reason  of  the  thing,  and  the  revulsion  and  bankruptcy 
it  has  repeatedly  occasioned  in  England,  had  not  been  sufficient  to 
convince  the  ParUament  and  the  public  of  the  propriety  of  restrict- 
ing the  issue  of  notes,  the  example  of  America  would  have  supplied 
the  deficiency.  There  are  Banks  of  issue  in  all  considerable  to^v^lS 
throughout  the  Union  ;  and  the  different  State  legislatures  have 
exhausted  their  skill  in  devising  schemes  for  the  regulation  of  these 
Banks,  by  ordering  that  certain  portions  of  their  capital  shall  be 
paid  up  befoi-e  they  begin  business,  and  that  the  amount  of  their 
issues  and  engagements  of  all  sorts  shall  be  governed  by  the 
amount  of  this  paid-up  capital.  And,  not  satisfied  with  laying 
down  rules  for  the  guidance  of  the  Banks,  they  make  the  Directors 
swear  their  observance,  order  returns  of  their  affiiirs  to  be  made 
public,  and  sometimes  appoint  inspectors  to  see  that  the  regulations 
are  complied  with.  The  result  of  all  this  cumbrous  quackery  ia 
precisely  such  as  every  man  of  sense  would  anticipate.  The  bank- 
ing system  of  America  is  the  bane  of  the  country  ;  it  is,  in  fact,  as 
bad  as  can  well  be  imagined,  and  has  been  the  means  of  alternately 
diffusing  a  spirit  of  improvident  and  wild  speculation  throughout 
the  Union,  and  then  of  plunging  it  into  all  but  universal  bank- 
ruptcy. The  rules  devised  for  the  regulation  of  the  Banks  are  good 
for  nothing,  unless  it  be  to  delude  or  deceive.  They  restrain  none 
but  the  opulent,  honest,  and  conscientious  bankers,  who  do  not 
require  to  be  placed  under  any  sort  of  surveillance ;  and  aflbrd 
every  one  else  an  opportunity,  by  misleading  the  inspectors  and 
making  false  and  exaggerated  statements  of  their  affairs,  to  get 
their  condition  represented  as  most  prosperous,  when,  perhaps, 
it  is  very  much  the  reverse."  ^ 

In  reference  to  the  system  of  the  United  States,  Mr.  McCul- 
loch only  repeated,  parrot-like,  the  lesson  taught  him,  with  no 
more  understanding  of  the  subject  than  of  the  configuration 

1  Notes  to  Smith's  Wealth  of  Nations,  p.  502. 


SCOTCH   WRITERS   ON  MONEY.  327 

of  the  opposite  side  of  the  moon.  Nothing  can  be  more  dis- 
graceful in  a  man  like  him,  —  Professor  of  Political  Economy 
in  the  university  of  a  city  which,  commercially,  is  the  very 
eye  of  the  world,  and  standing  at  the  very  apex  of  his  school, 
—  than  the  ignorance  and  assurance  he  displayed.  Among  the 
numerous  systems  in  them,  if  the  Banks  erected  by  the  several 
States  are  to  be  called  systems,  there  were  many  bad  enough,  as 
there  was  at  the  time  any  amount  of  rottenness  in  the  English 
system,  or  in  the  Banks  of  which  it  may  said  to  be  composed. 
Human  nature  is  the  same  on  both  sides  of  the  water.  There 
are  plenty  of  adventurers  in  both  countries,  who  will,  if  they 
can,  impose  their  issues  upon  the  public  to  serve  as  money  ; 
who  will  either  make  no  provision  at  all  for  their  redemption, 
or  only  such  as  they  can  make  after  the  issues  are  made.  In 
the  large  towns  of  both  countries,  the  systems  were  good  ; 
that  is,  those  who  issued  notes  were  compelled  to  make  ade- 
quate provision  for  their  redemption,  previous  to  their  issue, 
as  the  necessary  condition  of  getting  them  into  circulation. 
Mr.  McCulloch  might  just  as  well  have  said  that  the  Ameri- 
cans were  too  dishonest  to  construct  good  roads  or  warehouses, 
as  to  create  good  Banks  and  properly  administer  them.  There 
is  always  more  of  adventure,  and  a  far  feebler  sense  of  the 
importance  of  what  is  called  commercial  integrity,  among  a 
pioneer  than  among  a  trading  people  ;  but,  under  similar  cir- 
cumstances, similar  results  are  produced  the  world  over ;  and, 
in  the  end,  the  best  methods  will  always  be  made  use  of,  or 
will  always  be  sought.  To  assume  otherwise  is  to  adopt  a 
conclusion  far  worse  than  the  baldest  pessimism,  —  that  soci- 
ety itself  is  incapable  of  continued  existence. 

In  passing  in  review  before  us  the  arguments  and  conclusions 
upon  the  subject  of  money  of  Hume,  Smith,  Stewart  and 
McCulloch,  —  all  Scotchmen,  and  among  the  most  distinguished 
of  their  race,  —  nothing  can  excite  greater  wonder  than  the 
incapacity  of  all  to  conduct  an  argument  upon  it  through 
even  a  single  paragraph,  without  involving  themselves  in  the 
grossest  mistakes  and  contradictions;  and  that,  too,  upon  a 
subject  coming  almost  wholly  within  the  range  of  the  exact 
sciences.  To  what  is  tliis  apparent  feebleness  of  intellect  — 
this  inability  to  make  even  ordinary  distinctions,  and  tliis  pas- 
sion for  finding  them  where  no  diiferences  exist,  due  ?     No 


328  HISTORY  OF    MONETARY  THEORIES. 

Other  explanation  can  be  given  tlian  the  uniformity  in  religion 
and  dogma  which  so  long  prevailed  in  their  country.     The 
reasoning  faculty  of  her  people  was,  as  it  were,  lost,  for  want 
of  proper  objects  for  its  exercise,  or  from  its  improper  exer- 
cise.    When   emancipation,  or  whatever  it  may  be   termed, 
came,  the  habit  of  assuming,  instead  of  proving,  had  become 
too   strong  even   for  such   men    as    Hume    and   Smith,  who 
were    certainly   no    churchmen.     When    they   began    to    in- 
quire in  reference  to  matters  other  than  those  which  related 
to  relio-ioLis  dogma,  they  used  precisely  the  same  methods  as 
were  used  by  those  remaining  within  the  pale.     It  was  far 
easier  to  assume  than  to  investigate  ;  but  very  unsafe  when 
the  subjects   for   investigation  were  the   phenomena   of   the 
physical  world,  the  operations  of  society,  or  the  laws  of  mat- 
ter.    When    Smith    asserted    that    "  the    amount    of    paper 
money  which  can  circulate  in  any  country  can  never  exceed 
the  amount  of  coin  which  would  have  circulated  in  its  place  ;  " 
that  "  money  has  two  distinct  and  separate  functions,  —  one 
as  an  instrument  of  commerce,  the  other   as  a   measure  of 
value  ; "    that  "  the   great    wheel    of  circulation "    (metallic 
money)  "  is  altogether  different  from  the  goods  which  are  cir- 
culated by  it ;  "  that  "  it  forms  no  part  of  the  revenue  of  an 
individual   or   nation  ;  "  and    that,   "  of  all  kinds  of  capital, 
money  is  the  least  valuable,"  —  it  never  occurred  to  him  that 
these  statements  were  not  proofs.    He  assumed  them  as  axioms 
with  which  to  construct  his  more  complex  propositions.     He 
might   just    as  well   have  entered  upon   solutions   in  geom- 
etry by  assuming   an  acute   angle  to  always   equal   a  right 
angle.     As   his  premises  were  wholly  false,  his   conclusions 
could  not  be  less  so.     His  followers,  bowing  abjectly  in  so 
great  a  presence,  accepted  without   the  least  reservation  or 
qualification   the   assumptions   upon   money  of  their  master. 
Unfortunately,  he  was  as  lacking  in  intuition  as  in  method. 
He  had  not  a  touch  of  that  inspiration  by  means  of  which 
great  truths  first  find  their  expression,  to  become,  in  time,  the 
property  of  the  race.     He  could  never  forget  himself,  or  get 
away  from  himself.    He  could  not  even  stop  to  analyze  the  sys- 
tem of  his  own  country,  wliich,  when  he  wrote,  had  been  in  oper- 
ation nearly  a  hundred  years  ;  an  examination  of  which  would 
have  completely  disproved  ever}' proposition  made  by  him  in  ref- 
erence to  money.    What  he  did  not  propose  or  attempt,  it  would 


SCOTCH  WRITERS   ON  MONEY.  329 

have  been  in  the  highest  degree  irreverent  for  his  followers  to 
do.  It  was  natural  that  an  ignorant  or  excited  people  in  a 
great  extremity,  and  conscious  of  their  impotence,  should 
take  refuge  in  theories  and  conclusions  laid  down  by  author- 
ity, as  it  were,  in  the  books,  without  the  least  comprehension 
of  their  validity  or  effect.  It  is  in  this  way  that  specula- 
tion, grounded  on  no  principle  or  law,  gets  its  power  to  harm. 
The  Act  of  1844,  with  all  its  consequent  disasters,  was  the 
natural  and  direct  result  of  Smith's  propositions  upon  money, 
incessantly  reiterated  by  the  Economists  from  his  time  to  our 
own.  The  Scotch  people,  however,  have  been  far  wiser  than 
Scotch  thinkers  or  metaphysicians.  With  the  absurdest  theo- 
ries in  their  books,  they  have  the  best  system  of  banking  now 
existing,  and  one  of  the  best  that  has  ever  existed.  "With  them 
theory  and  practice  have  been  as  wide  apart  as  the  poles.  In 
this  respect,  they  closely  resemble  the  Puritan  emigrants  to 
this  country.  Were  one  to  examine  the  literature  and  legis- 
lation of  the  latter,  he  would  suppose  religious  metaphysics  to 
be  their  only  occupation  in  life.  Their  theme,  from  morning 
till  night,  appeared  to  be  the  truth  of  their  peculiar  views ; 
and  their  chief  labor,  to  sustain  them  from  Bible  texts.  Yet 
there  was  another  side  to  this  picture,  if  possible  far  more 
striking.  Their  discussions  in  theology  took  very  little  time 
or  thought  necessary  for  the  discharge  of  the  graver  duties  of 
life.  In  all  their  affairs  they  displayed  an  energy,  persistency, 
and  soundness  of  judgment  which  made  them  one  of  the 
greatest  marvels  of  material  prosperity  and  success  the  world 
has  yet  seen.  The  wrongs  and  mistakes  they  did  commit 
came,  like  those  of  the  Scotch,  fi-om  the  speculative  side  of 
their  nature.  A  traveller  who  visited  them  in  the  earlier 
part  of  the  eighteenth  century,  after  describing  their  formal 
manners,  their  uncouth  scriptural  language,  their  constant  and 
rigid  observance  of  religious  forms,  by  no  means  agreeable  to 
him,  winds  up  the  strange  picture  with  the  statement  of  a  fact 
which  still  more  excited  his  wonder,  and  defied  explanation, — 
"  but  great  numbers  among  them  are  damnably  rich !  "  Indeed, 
a  strong  religious  sentiment  seems  to  exert  a  powerful  influ- 
ence favorable  to  the  accumulation  of  wealth,  for  the  reason 
that  a  people  subject  to  it  are  the  more  persistent  in  their 
industries,  and  the  more  economical  in  their  expenditures. 


330  HISTORY   OF  MONETARY  THEORIES. 

If  we  must  go  to  ISIcCulloch  to  learn  the  opinions  and  theo- 
ries held  by  the  Economists,  particularly  those  which  relate  to 
the  subject  of  money,  we  must  go  to  Mr.  Stuart  Mill  to  learn 
what  is  now  taught  in  reference  to  it.  His  work  on  Political 
Economy  is  the  great  text-book  on  both  sides  of  the  water.  It 
is  made  a  part  of  the  course  in  nearly  all  the  institutions  in 
which  this  science  is,  or  is  assumed  to  be  taught.  If  his  own 
works  are  not  directly  used,  it  is  only  for  the  reason  that  it  has 
become  a  habit  with  almost  all  teachers  or  professors  of  Polit- 
ical Economy  in  this  country,  to  get  up  works  of  their  own ; 
based,  however,  almost  wholly  upon  the  teachings  of  this,  the 
great  light  in  modern  Economy. 

"  Money,"  says  Mill,  "  when  its  use  has  grown  habitual,  is  the 
medium  through  which  the  incomes  of  the  different  members  of 
the  community  are  distributed  to  them,  and  the  measure  by  which 
they  estimate  their  possessions.  As  it  is  always  by  means  of  money 
that  people  provide  for  their  different  necessities,  there  grows  up 
in  their  minds  a  powerful  association,  leading  them  to  regard 
money  as  wealth  in  a  more  peculiar  sense  than  any  other  article ; 
and  even  those  who  pass  their  lives  in  the  production  of  the  most 
useful  objects  acquire  the  habit  of  regarding  those  objects  as  chiefly 
important  by  their  capacity  of  being  exchanged  for  money.  A  per- 
son who  parts  with  money  to  obtain  commodities,  unless  he  intends 
to  sell  them,  appears  to  the  imagination  to  be  making  a  worse  bar- 
gain than  a  person  who  parts  with  commodities  to  get  money  ;  the 
one  seems  to  be  spending  his  means,  the  other  adding  to  them  : 
illusions  which,  though  now  in  some  measure  dispelled,  were  long 
powerful  enough  to  overmaster  the  mind  of  every  politician,  both 
speculative  and  ])ractical,  in  Europe. 

"  It  must  be  evident,  however,  that  the  mere  introduction  of  a 
pai'ticular  mode  of  exchanging  things  for  one  another,  by  first 
exchanging  a  thing  for  money,  and  then  exchanging  the  money  for 
something  else,  makes  no  difference  in  the  essential  character  of 
transactions.  It  is  not  with  money  that  things  are  really  pur- 
chased. Nobody's  income  (except  that  of  the  gold  or  silver  miner) 
is  derived  from'  the  precious  metals.  The  pounds  or  shillings 
which  a  person  receives  weekly  or  yearly  are  not  what  constitute 
his  income :  they  are  a  sort  of  tickets  or  orders  which  he  can  pre- 
sent for  payment  at  any  shop  he  pleases,  and  which  entitle  him  to 
receive  a  certain  value  of  any  commodity  that  he  makes  choice  of. 
The  farmer  pays  his  laborers  and  his  landlord  in  these  tickets,  as 
the  most  convenient  plan  for  himself  and  them :  but  their  real 
income  is  their  share  of  his  corn,  cattle,  and  hay,  and  it  makes  no 
essential  difference  whether  he  distributes  it  to  them  direct,  or 
sells  it  for  them  and  gives  them  the  price  ;  but  as  they  would  have 
to  sell  it  for  money  if  he  did  not,  and  as  he  is  a  seller  at  any  rate, 
it  best  suits  the  purposes  of  all  that  he  should  sell  their  share  along 


JOHN  STUART  IHILL.  331 

"with  his  own,  and  leave  the  laborers  more  leisure  for  work,  and 
the  landlord  for  being  idle.^  The  capitalists,  except  those  who  are 
producers  of  the  precious  metals,  derive  no  part  of  their  income 
from  those  metals,  since  they  only  get  them  by  buying  them  with 
their  own  produce  ;  while  all  other  persons  have  their  incomes 
paid  to  them  by  the  capitalists,  or  by  those  who  have  received 
payment  from  the  capitalists ;  and,  as  the  capitalists  have  nothing 
from  the  first  except  their  produce,  it  is  that  and  nothing  else 
which  supplies  all  incomes  furnished  by  them.  There  cannot,  in 
short,  be  intrinsically  a  more  insignificant  thing  in  the  economy  of 
society  than  money,  except  in  the  character  of  a  contrivance  for 
sparing  time  and  labor.  It  is  a  machine  for  doing,  quickly  and  com- 
modiously,  what  would  be  done,  though  less  quickly  and  commo- 
diously,  without  it ;  and,  like  many  other  kinds  of  machinery,  it 
only  exerts  a  distinct  and  independent  influence  of  its  own  when  it 
gets  out  of  order.'^ 

Mankind,  from  habit,  says  Mill,  came  to  regard  money  as 
being  peculiarly  wealth ;  and  that  objects  are  useful  and  valu- 
able in  ratio  to  their  capacity  of  being  exchanged  for  it.  But 
is  not  such  capacity  a  proper  test  of  value?  Have  articles 
that  will  not  exchange  for  money  any  value  ?  Is  not  the  uni- 
form experience  of  mankind,  from  the  time  that  exchanges 
first  began  to  be  made,  of  more  force  than  Mill's  assertion  to 
the  contrary  ?  Are  not  gold  and  silver  something  beyond 
mere  tickets  or  orders  invented  "  for  doing  quickly  and  com- 
modiously  what  would  be  done,  but  less  quickly  and  commo- 
diously,  without  them?"  Are  they  not  the  most,  instead  of 
being  the  least,  significant  things  in  the  economy  of  society? 
As  ca]3ital,  they  can  always  be  loaned  at  interest.  They  are 
the  universal  equivalent, —  that  into  which  every  one  seeks  to 
convert  whatever  he  acquires  not  necessary  to  his  immediate 
wants.  They  are  the  only  articles  fitted  to  constitute  the 
reserves  of  society,  as  they  are  imperishable,  and  preserve 
their  value,  uniform,  from  age  to  age.  They  are  the  only  arti- 
cles which  can  be  sent  to  every  part  of  the  world  with  the 
certainty  of  always  being  accepted  at  their  cost.  If  the  pre- 
cious metals  alone,  of  all  articles  of  merchandise  or  j)roperty, 
possess  such  attributes,  then  INIill's  description  of  their  nature 
and  function  is  inadequate  and  puerile  to  the  last  degree. 

1  Nothing  more  strikingly  illustrates  Mill's  incapacity  for  scientific  inquiry, 
the  puerility  of  his  mind,  and  the  infirmity  of  his  temper,  than  his  assertion  that 
one  reason  for  the  conversion  by  the  farmer  of  his  products  into  money  was  to 
give  his  landlord  "  more  leisure  for  being  idle."  He  could  not  discuss  a  purely 
scientific  subject  without  intruding  spiteful  and  irrelevant  personalities  and  flings. 

'■^  Political  Economy,  vol.  IL  pp.  7-9. 


332  HISTORY   OF   MONETARY   THEORIES. 

"When,"  says  Mill,  "one  person  lends  to  another,  as  well  as 
when  he  pays  wages  or  rent  to  another,  what  he  transfers  is  not 
the  mere  money,  but  a  right  to  a  certain  value  of  the  produce  of 
the  country,  to  be  selected  at  pleasure ;  the  lender  having  first 
bought  this  right  by  giving  for  it  a  portion  of  his  capital.  What 
he  really  lends  is  so  much  capital ;  the  money  is  the  mere  instru- 
ment of  transfer.  But  the  capital  usually  passes  from  the  lender 
to  the  receiver,  through  the  means  either  of  money  or  of  an  order 
to  receive  money  ;  and,  at  any  rate,  it  is  in  money  that  the  capital 
is  computed  and  estimated.  Hence,  borrowing  capital  is  univer- 
sally called  borrowing  money  ;  the  loan  market  is  called  the  money 
market ;  those  who  have  their  capital  disposable  for  investment  on 
loan  are  called  the  moneyed  class  ;  and  the  equivalent  given  for 
the  use  of  capital,  or  in  other  words,  interest,  is  not  only  the  in- 
terest of  money,  but,  by  a  grosser  perversion  of  terms,  the  value 
of  money.  This  misapj>lioation  of  language,  assisted  by  some 
fallacious  appearances  which  we  shall  notice  and  clear  up  here- 
after, has  created  a  general  notion  among  persons  in  business,  that 
the  value  of  money,  meaning  the  rate  of  interest,  has  an  intimate 
connection  with  the  value  of  money  in  its  proper  sense, —  the 
value  or  purchasing  )iower  of  the  circulating  medium.  We  shall 
come  to  this  subject  before  long;  at  present,  it  is  enough  to  show 
that  by  value  I  shall  always  mean  exchange  value ;  and  by 
money,  the  medium  of  exchange,  not  the  capital  which  is  passed 
from  hand  to  hand  through  that  medium.  .  .  . 

"  As  the  whole  of  the  goods  in  the  market  compose  the  demand 
for  money,  so  the  whole  of  the  money  constitutes  the  demand  for 
goods.  The  money  and  the  goods  are  seeking  each  other,  for  the 
purpose  of  being  exchanged.  They  are  reciprocally  supply  and 
demand  to  one  another.  It  is  indifferent  whether,  in  characteriz- 
ing the  phenomena,  we  speak  of  the  demand  and  the  supply  of 
goods,  or  the  supply  and  demand  of  money :  they  are  equivalent 
expressions.  ... 

"  Supposing  the  money  in  the  hands  of  individuals  to  be  in- 
creased, their  wants  and  inclinations  collectively,  in  respect  to  con- 
sumption, remaining  exactly  the  same,  the  increase  of  demand 
would  reach  all  things  equally,  and  there  would  be  a  universal 
rise  of  prices.  We  might  suppose,  with  Hume,  that  some  morning 
every  person  in  the  nation  should  wake  and  find  a  gold  coin  in  his 
pocket ;  this  example,  however,  would  involve  an  alteration  of  the 
proportion  in  the  demand  for  different  commodities ;  the  luxuries 
of  the  poor  would,  in  the  first  instance,  be  raised  in  price,  in  a 
much  greater  degree  than  other  things.  Let  us  rather  suppose,  there- 
fore, that  to  every  pound  or  shilling  or  penny  in  the  possession  of 
any  one,  another  pound,  shilling,  or  penny  were  suddenly  added. 
There  would  be  an  increased  money  demand;  and,  consequently, 
an  increased  money  value,  or  price,  for  things  of  all  soi'ts.  This 
increased  value  would  do  no  good  to  any  one;  would  make  no 
difference,  except  that  of  having  to  reckon  pounds,  shillings,  and 
pence  in  higher  numbers.  It  would  be  an  incx'ease  of  values  only 
as  estimated  in  money,  —  a  thing  only  wanted  to  buy  other  things 
with  ;   and  would  not  enable  any  one  to  buy  more  of  them  than 


JOHN   STUART   MILL.  333 

before.     Prices  would  have  risen  in  a  certain  ratio,  and  the  value 
of  money  would  have  fallen  in  the  same  ratio.  .  .  . 

"  The  very  same  effect  would  be  produced  on  prices,  if  we  sup- 
pose the  goods  diminished,  instead  of  the  money  increased ;  and 
the  contrary  effect,  if  the  goods  were  increased  or  the  money 
diminished.  If  there  were  less  money  in  the  hands  of  the  com- 
munity, and  the  same  amount  of  goods  to  be  sold,  less  money 
altogether  would  be  given  for  them,  and  they  would  be  sold  at 
lower  prices  ;  lower,  too,  in  the  precise  ratio  in  which  the  money 
was  diminished.  So  that  the  value  of  money,  other  things  being 
the  same,  A'aries  inversely  as  its  quantity ;  every  increase  of  quan- 
tity lowering  the  value,  and  every  diminution  raising  it  in  a  ratio 
exactly  equivalent.^ 

If  the  money  (gold  and  silver)  of  every  person  in  a  com- 
munity were  suddenly  doubled,  without  any  act  of  his  own, 
would  not  every  one  be  better  off?  No,  says  Mill :  you  have, 
in  such  case,  two  tickets,  indeed,  instead  of  one  ;  but  they  w^ill 
bring  you  only  the  articles  or  values  that  one  would  before. 
But  suppose  a  person  holding  10,000  sovereigns  has  added  to 
them  another  10,000.  Having  no  occasion  for  the  use  of  the 
latter  amount  for  the  purchase  of  food  or  clothing,  or  for 
expenses  of  any  kind,  he  might,  with  great  advantage, 
supplement  his  domestic  utensils  of  iron  by  those  of  gold 
and  silver.  He  might  erect  structures,  or  cover  his  roof, 
with  a  substance  wholly  indestructible  by  the  elements. 
When  the  vast  number  of  uses  to  which  they  could  be 
applied,  which  now  have  to  be  supplied  by  materials  so  perish- 
able as  to  impose,  in  their  cost  and  repair,  the  greatest  of 
burdens  upon  society,  is  considered,  it  would  seem  to  have 
been  an  oversight  in  nature  that  that  which  is  fitted  to  serve  the 
highest  uses  should  not  have  been  produced  in  greater  abun- 
dance. But  the  designs  and  scope  of  Providence  embrace 
other  matters  than  domestic  utensils,  fair  structures,  and  im- 
pervious roofs.  A  solvent  of  all  transactions  had  to  be  pro- 
vided as  the  prime  condition  of  htunan  progress,  and  of  high 
value  in  ratio  to  its  quantity,  to  be  easily  borne  about  by  those 
who  were  to  use  it.  Gold  and  silver,  therefore,  could  not  be 
supplied  in  the  same  profusion  as  iron,  without  losing  the 
greater  part  of  the  attributes  which  constitute  their  value  as 
agencies  in  the  progress  and  welfare  of  mankind.  If  they 
were  to  become  as  abundant  as  iron,  all  the  operations  of  society 

1  Political  Economy,  vol.  ii.  pp.  9-12. 


334  HISTORY   OF   MONETARY  THEORIES. 

would  have  to  pause  till  tlie  place  they  now  supply  was  made 
good  by  articles  having  similar  attributes  or  functions  in  the  new 
order  of  things.  In  the  world  constructed  by  the  Economists, 
gold  is  almost  wholly  dethroned,  without  any  other  provision 
in  its  place.  A  world  of  their  own  creation  would  be  the  best 
commentary  upon  their  absurd  and  incoherent  theories. 

"  When  a  person  lends,"  says  Mill,  in  effect,  "  as  well  as 
when  he  pays  money  or  wages  to  another,  that  which  he  lends 
is  not  the  money,  but  capital.  The  money  is  the  mere  instru- 
ment of  transfer.  But  as  capital  usually  passes  from  lender 
to  receiver  through  the  means  of  money,  it  is  in  money  that 
the  amount  of  capital  is  computed  and  estimated.  Hence,  the 
borrowing  of  capital  is  universally,  but  very  improperly, 
called  the  borrowing  of  money.  The  language  is  just  as 
much  misapplied  as  it  would  be  to  call  the  transaction  by 
which  a  person  borrowed  a  load  of  potatoes  for  consumption, 
and  a  cart  for  the  purpose  of  bringing  them  home,  the  borrow- 
ing of  a  cart :  it  is  not  the  cart  that  is  borrowed,  but  the 
potatoes.  So  when  a  man  borrows  a  sovereign :  the  sove- 
reign is  not  the  capital  borrowed,  but  the  means  by  which 
it  is  borrowed."  With  Mill,  as  with  Smith,  it  is  not  money 
(gold  and  silver)  which  constitutes  a  man's  capital  or  his 
income,  but  that  which  gold  and  silver  buys.  The  absurdity 
of  all  such  distinctions  has  been  already  sufficiently  demon- 
strated. 

"  If  we  assume,"  continues  Mill, "  the  quantity  of  goods  on  sale,  and 
the  number  of  times  these  goods  are  resold,  to  be  fixed  quanti- 
ties, the  value  of  money  will  depend  upon  its  quantity,  together  with 
the  average  number  of  times  that  each  piece  changes  hands  in  the 
process.  The  whole  of  the  goods  sold  (counting  each  resale  of  the 
same  goods  as  so  much  added  to  the  goods)  have  been  exchanged 
for  the  whole  of  the  money,  multiplied  by  the  niamber  of  purchases 
made  in  the  average  by  each  piece.  Consequently,  the  amount  of 
goods  and  of  transactions  being  the  same,  the  value  of  money  is 
inversely  as  its  quantity,  multiplied  by  what  is  called  the  rapidity 
of  circulation.  And  the  quantity  of  money  in  circulation  is  equal 
to  the  money  value  of  all  the  goods  sold,  divided  by  the  number 
which  exj^resses  the  rapidity  of  circulation."  ^ 

After  referring  to  the  increased  amount  of  money  (bank- 
notes) wanted  for  extraordinary  payments  at  certain  periods 
of  the  year,  he  goes  on  to  say :  — 

^  Political  Economy,  vol.  ii.  p.  16. 


JOHN   STUAET   MILL.  335 

"  If  extra  currency  were  not  forthcoming  to  make  these  extra 
payments,  one  of  three  things  must  liappen  :  Either  the  payments 
must  be  made  without  money,  by  a  resort  to  some  of  those  con- 
trivances by  which  its  use  is  dispensed  with  ;  or,  there  must  be  an 
increase  in  the  rapidity  of  circulation^  the  same  sum  of  money 
being  made  to  perform  more  payments;  or  if  neither  of  these 
things  took  place,  money  to  make  the  extra  payments  must  be 
withdrawn  from  the  market  for  commodities,  and  prices,  conse- 
quently must  fall.  An  increase  of  the  circulating  medium,  con- 
formable in  extent  and  duration  to  the  temporary  stress  of  business, 
does  not  raise  prices,  but  merely  prevents  this  fall. 

"  The  sequel  of  our  investigation  will  point  out  many  other  ex- 
planations and  qualifications  with  which,  the  proposition  must  be 
received,  that  the  value  of  the  circulating  medium  depends  on  the 
demand  and  supply,  and  is  in  the  inverse  ratio  of  the  quantity."  ^ 

The  value  of  money,  says  Mill,  is  in  inverse  ratio  to  its 
quantity  multiplied  by  the  rapidity  of  its  circulation.  He 
mio-ht  as  well  have  framed  a  similar  formula  in  reference  to 
the  value  of  a  loaf  of  bread  :  —  "a  loaf  sufficient  for  the  break- 
fast of  one  man,  moAdng  at  the  rate  of  one  foot  per  second, 
will  be  sufficient  for  the  breakfast  of  ten  men,  and  of  equal  value 
to  ten  loaves,  by  moving  at  the  rate  of  ten  feet  per  second." 
In  the  application  of  his  doctrine,  the  choice  of  position  might 
be  considered  of  some  consequence.  So,  "if  more  money  be 
required  to  move  the  crops,  one  of  three  things  must  happen : 
either  the  payments  must  be  made  without  money ;  or  there 
must  be  an  increase  in  the  rapidity  of  the  circulation,  the  same 
amount  of  money  being  made  to  do  double  dutj- ;  or  money 
must  be  withdrawn  from  the  market  for  other  commodities." 
The  better  way  would  seem  to  be  to  make  money  do  double 
duty.  "  A  nimble  sixpence  is  better  than  a  slow  shilling  "  may 
be  quoted  iu  proof.  An  objection  to  the  forced  activity,  or, 
indeed,  to  any  activity  of  money,  is  the  attrition  which  is  esti- 
mated to  reduce  its  value  at  the  rate  of  one  per  cent  annually. 
If  made  to  do  double  duty,  its  wear  would  equal  two  per  cent. 
A  piece  would  then  last  only  fifty  years.  But  if  one  could  be 
made  to  do  the  duty  of  two,  the  relative  gain  would  still  be 
enormous.  It  would  have  been  well  for  Mr.  Mill  to  have 
detailed  the  process  by  which  increased  "  rapidity  of  circula- 
tion "  is  to  be  secured.  As  by  its  use  the  ownership  of  money 
is  always  parted  with,  and  as  the  propriety  of  its  use  depends 

1  Political  Economr,  toI.  ii.  p.  21. 


336  HISTORY   OF    ISIONETAEY  THEORIES. 

upon  the  equivalent  received,  the  holder  might  well  object  to 
part  with  it  to  help  forward  the  operations  of  his  impecunious 
and  less  fortunate  neighbors.  Where  their  wants  were  the 
greatest  they  would  have  the  least  to  offer  for  it.  The  greater 
the  demand,  the  greater  the  distrust,  and  the  more  tenaciously 
would  it  be  held  by  its  churlish  and  selfish  owners.  As  the 
need  of  money  is  the  imj)erative  one  the  world  over,  and  as  it 
should  be  relieved  once  for  all.  Economists  should  set  them- 
selves to  work,  either  to  provide  a  sufficient  quantity,  or  to  show 
how,  by  "  rapidity  of  circulation,"  an  infinitesimal  quantity,  as 
it  were,  may  do  the  work  of  a  mass  as  big  as  the  moon.  If 
money  could  be  made  to  revolve  with  sufficient  raj)idity,  every 
one  now  having  but  one  dollar  in  his  pocket,  in  a  given  period, 
might  have  ten.  But  such  a  result  would  after  all,  according 
to  Mill,  be  a  very  bootless  one  ;  for  if  every  one  had  ten  dollars 
in  his  pocket  where  he  now  has  but  one,  the  prices  of  every 
thing  else  would  rise  in  like  ratio  ;  so  that  he  would  be  no 
better  off  with  ten  than  with  one.  The  great  problem,  there- 
fore, which  the  Economists  should  lose  no  time  in  solving  is  to 
secure  a  rapidity  of  the  circulation  ten  times  greater  than  its 
present  rate,  prices  of  all  kinds  remaining  the  same.  This 
done,  the  financial  and  material  millennium  would  for  the  first 
time  dawn  upon  the  race,  and  the  Economists,  for  once,  would 
have  turned  their  labors  to  some  account. 

But  may  there  not  be  some  fallacy  in  Mr.  Mill's  assumption 
that  money  has,  or  may  have,  an  activity  greater  than  that  of 
other  kinds  of  merchandise  ?  Suppose  a  person  in  his  pur- 
chases not  to  part  with  his  money ;  that  as  a  yardstick,  as 
a  measure  of  extension,  is  always  retained  by  its  owner, 
whether  he  be  purchaser  or  seller,  so  money  serves  as  the 
measure  of  values  without  being  parted  with.  In  such  case, 
a  person  whose  expenditures  were  $100  a  week  would  require 
only  that  amount  of  money,  or  onl}^  one-seventh  of  it,  pro- 
vided an  equal  amount  of  purchases  was  made  daily.  It  is 
plain,  in  such  case,  that  there  would  be  no  more  activity  of 
money  than  merchandise,  —  no  more  than  of  the  j'ardstick. 
The  same  would  be  the  case  if  he  used  the  money  but  once : 
he  can  use  it  only  once.  But  the  person  who  receives  it  irom 
him  can  use  it  only  once  :  it  is  then  functus  officio  to  him.  So 
far  as  each  is  concerned,  there  is  the  same  activity  in  the  mer- 


JOHN   STUART   MILL.  337 

chandise  as  in  the  money  paid  for  it,  and  the  converse.  Equiva- 
lents are  exchanged.  Their  activity  in  the  exchange,  if  such 
attribute  can  be  predicated  of  either,  is  precisely  the  same.  As 
the  purchases  a  person  makes  equal  the  money  he  is  possessed 
of,  and  the  converse,  so  the  purchases  made  by  society  equal 
the  money  it  is  possessed  of.  The  money  of  society,  therefore, 
and  the  merchandise  fitted  for  or  entering  into  consumption, 
necessarily  equal  the  one  the  other.  There  must,  therefore, 
be  the  same  activity  of  its  merchandise  as  of  its  money.  It  is 
true  that  the  merchandise  has  been  consumed  while  the  money 
has  not ;  but  the  merchandise  has  been  productively  consumed, 
to  reappear  in  the  same  or  other  forms.  When  it  reappears, 
it  is  then  ready  for  exchange  for  the  very  money  its  antecedent 
was  exchanged  for,  the  place  of  which  it  has  taken.  If  it 
do  not  reappear,  the  money  has  nothing  to  do,  and  will  be  ex- 
ported as  an  article  for  which  there  is  no  domestic  use.  It  is 
demonstrable,  therefore,  that  the  merchandise  of  society  at 
any  one  time  entering  into  consumption  equals  the  money  of 
society ;  and  that  the  one  possesses  precisely  the  same  degree 
of  activity  as  the  other.  No  assumption  has  been  more  dwelt 
upon  by  the  Economists  than  the  superior  activity  of  money 
to  merchandise,  while  there  is  none  so  utterly  absurd. 

"  It  is  not,  however,"  continues  Mill,  "  with  ultimate  or  average, 
but  with  immediate  and  temporary,  prices  that  we  are  now  con- 
cerned. These,  as  we  have  seen,  may  deviate  very  widely  from 
the  standard  or  cost  of  production.  Among  other  causes  of  fluc- 
tuation, one  we  have  found  to  be  the  quantity  of  money  in  circula- 
tion. Other  things  being  the  same,  an  increase  of  the  money  in 
circulation  raises  prices;  a  diminution  lowers  them.  If  more 
money  is  thrown  into  circulation  than  the  quantity  which  can  cir- 
culate at  a  value  conformable  to  its  cost  of  production,  the  value 
of  money,  so  long  as  the  excess  lasts,  will  remain  below  the  stand- 
ard or  cost  of  production,  and  general  prices  will  be  sustained 
above  the  natural  rate. 

"  But  we  have  now  found  that  there  are  other  things,  such  as 
bank-notes,  bills  of  exchange,  and  checks,  which  circulate  as  money, 
and  perform  all  the  functions  of  it ;  and  the  question  arises,  Do 
these  various  substitutes  operate  on  prices  in  the  same  manner  as 
money  itself  ?  Does  an  increase  in  the  quantity  of  transferable 
paper  tend  to  raise  prices  in  the  same  manner  and  degree  as  an 
increase   in  the  quantity   of  money?  .... 

"  I  apprehend  that  bank-notes,  bills,  or  checks,  as  such,  do  not  act 
on  prices  at  all.  What  does  act  on  prices  is  credit,  in  whatever 
shape  given  ;  and  whether  it  gives  rise  to  any  transferable  instru- 
ments capable  of  passing  into  circulation,  or  not. 

22 


338  HISTOEY   OF   MONETARY   THEORIES. 

"  I  proceed  to  explain  and  subst.".ntiate  this  opinion. 

"Money  acts  upon  prices  in  no  other  way  than  by  being  tendered 
in  exchange  for  commodities.  The  demand  which  influences  the 
prices  of  "commodities  consists  of  the  money  offered  for  them. 
But  the  money  offered  is  not  the  same  thing  with  the  money  pos- 
sessed. It  is  sometimes  less,  sometimes  much  more.  In  the  long 
run,  indeed,  the  money  which  people  lay  out  will  be  neither  more 
nor  less  than  the  money  which  they  have  to  lay  out ;  but  this  is 
far  from  being  the  case  at  any  given  time.  Sometimes  they  keep 
money  by  them  for  fear  of  an  emergency,  or  in  expectation  of  a 
more  advantageous  opportunity  for  expending  it.  In  that  case,  the 
money  is  said  not  to  be  in  circulation  ;  in  plainer  language,  it  is 
not  offered,  nor  about  to  be  offered,  for  commodities.  Money  not 
in  circulation  has  no  effect  on  prices.  The  converse,  however,  is  a 
much  commoner  case  ;  people  make  purchases  with  money  not  in 
their  possession.  An  article,  for  instance,  which  is  paid  for  by  a 
check  on  a  banker,  is  bought  with  money  which  not  only  is  not  in  the 
payer's  possession,  but  generally  not  even  in  the  banker's,  having 
been  lent  by  him  (all  but  the  usual  reserve)  to  other  persons.  We 
just  now  naade  the  imaginary  supposition  that  all  persons  dealt 
with  a  Bank,  and  all  with  the  same  Bank,  pajTnents  being  univer- 
sally made  by  checks.  In  this  ideal  case,  there  could  be  no  money 
anywhere  except  in  the  hands  of  the  banker  ;  who  might  then 
safely  part  with  all  of  it,  by  selling  it  as  bullion,  or  lending  it,  to  be 
sent  out  of  the  country  in  exchange  for  goods  or  foreign  securities. 
But  though  there  would  then  be  no  money  in  possession,  or  ulti- 
mately, perhaps,  even  in  existence,  money  would  be  offered,  and 
commodities  bought  with  it,  just  as  at  present.  People  would 
continue  to  reckon  their  incomes  and  their  capitals  in  money,  and 
to  make  their  iisual  purchases  with  orders  for  the  receipt  of  a 
thing  which  would  ha^•e  literally  ceased  to  exist.  There  would  be 
in  all  this  nothing  to  complain  of,  so  long  as  the  money  in  dis- 
appearing left  behind  it  an  equivalent  value  in  other  things,  appli- 
cable when  required  to  the  reimbursement  of  those  to  whom  the 
money  orignally  belonged. 

"  In  the  case,  however,  of  payment  by  checks,  the  purchases  are 
at  any  rate  made,  though  not  with  money  in  the  buyer's  possession, 
yet  with  money  to  wliich  he  has  a  right.  But  he  may  make 
purchases  with  money  which  he  only  expects  to  have,  or  even  only 
pretends  to  expect.  He  may  obtain  goods  in  return  for  his  accept- 
ances payable  at  a  future  time,  or  in  his  note  of  hand,  or  on  a 
simple  book  credit,  that  is,  a  mere  promise  to  pay.  All  these  pur- 
chases have  exactly  the  same  effect  on  price,  as  if  they  were  made 
with  ready  money.  The  amount  of  purchasing  power  which  a 
person  can  exercise  is  composed  of  all  the  money  in  his  possession 
or  due  to  him,  and  of  all  his  credit.  For  exercising  the  whole  of 
this  power,  he  finds  a  sufficient  motive  only  under  peculiar  circum- 
stances ;  but  he  always  possesses  it,  and  the  portion  of  it  which  he 
at  any  time  does  exercise  is  the  measure  of  the  effect  which  he 
produces  on  price. 

"  Suppose  that,  in  the  expectation   that  some  commodity  will 


JOHN   STUAKT   l^IILL.  339 

rise  in  price,  he  determines  not  only  to  invest  in  it  all  his  ready 
money,  but  to  take  up  on  credit,  from  the  producers  or  importers, 
as  much  of  it  as  their  opinion  of  his  resources  will  enable  him  to 
obtain.  Every  one  must  see  that  by  thus  acting  he  produces  a 
greater  effect'  on  price  than  if  he  limited  his  purchases  to  the 
monev  he  has  actually  in  hand.  He  creates  a  demand  for  the 
article  to  the  full  amount  of  his  money  and  credit  taken  together, 
and  raises  the  price  proportionally  to  both.  And  this  effect  is 
produced,  although  none  of  the  written  instruments  called  substi- 
tutes for  currency  may  be  called  into  existence,  though  the  trans- 
action mav  give  rise  to  no  bill  of  exchange,  nor  to  the  issue  of  a 
single  bank-note.  The  buyer,  instead  of  taking  a  mere  book  credit, 
might  have  given  a  bill  for  the  amount,  or  might  have  paid  tor  the 
goods  with  bank-notes  borrowed  for  that  purpose  from  a  banker  ; 
thus  making  the  purchase  not  on  his  own  credit  with  the  seller, 
but  on  the  banker's  credit  with  the  seller,  and  his  own  with  the 
banker.  Had  he  done  so,  he  would  have  produced  as  great  an 
effect  on  price  as  by  a  simple  purchase  to  the  same  amount  on  a  book 
credit,  but  no  greater  effect.  The  credit  itself,  not  the  form  and 
mode  in  which  it  is  given,  is  the  operating  cause."  ^ 

Two  things,  or  influences,  according  to  Mill,  act  upon 
prices,  —  money  (coin)  and  credit,  —  each  in  ratio  to  its  quan- 
tity or  amount.  Bills,  notes  of  Banks,  checks,  and  the  like,  do 
not  act  upon  them.  It  is  undoubtedly  possible  that  all  the 
sugar  in  the  market  might  be  bought  on  a  credit  to  mature  in 
six  months.  The  contract  might  not  even  be  reduced  to  writing. 
The  purchaser  might  then  put  up  the  price.  So  far,  credit 
may  be  said  to  act  upon  prices.  But  the  same  result  might 
have  been  produced  without  any  credit  whatever.  The 
holders  of  the  sugar,  which  they  purchased  and  paid  for,  might 
put  up  its  price,  by  refusing  to  sell  except  at  an  advance  ;  or  a 
purchaser  might  secure  the  whole  for  an  advance,  by  papng 
cash  or  bank-notes  for  it.  The  same  result  would  be  pro- 
duced without  credit  as  with.  Credit,  consequently,  may  or 
may  not  be  the  cause  of  the  rise.  If  it  were  unaccompanied 
by  any  contract  or  bill,  then  the  rise  in  price  -would  be  con- 
fined to  the  specific  article  operated  in.  But  suppose  the 
purchase,  for  speculative  purposes,  to  be  made  by  a  three- 
months'  bill,  and  that  this  be  discounted,  the  holder  of  the 
sugar  purchased  in  the  mean  time  refusing  to  sell  it,  the 
credit  in  such  case  would  affect  the  price  of  every  article 
upon  the  market.  The  sugar  would  have  been  converted 
into  money,  or  into  that  which  had  all  the  potency  of  money, 

1  Political  Economy,  vol.  ii.  pp.  50-53. 


340  HISTORY   OF  MONETARY  THEORIES. 

equal  in  amount  to  its  wliole  value,  to  act  upon  the  price  of 
articles  other 'than  that  which  it  represented.  The  sugar 
would  not  be  on  sale,  but  would  at  the  same  time  be  a  pur- 
chasing power  to  the  whole  extent  of  its  value.  It  is  im- 
possible, however,  that  any  considerable  number  of  sales  in 
large  amounts  should  be  made  by  book  account,  for  the  reason 
that  holders  of  merchandise  will  as  a  rule,  not  sell,  unless  they 
can  either  get  money,  or  that  which  by  means  of  Banks  can 
be  turned  into  money.  If  they  can  get  no  other  acknowledg- 
ment than  book  accounts,  they  will  prefer  to  hold,  unless  they 
are  disposed  to  sell  on  speculation.  It  is  to  be  remembered, 
that  they  are  usuall}^  owing  for  what  they  hold  ;  and  they  must 
sell  for  that  which  will  pay  their  debts,  —  for  that  which  can  be 
turned  into  money.  Ordinarily,  a  bill  given  for  merchandise 
is  equivalent  to  money.  The  object  of  Banks  is  to  turn  the 
representatives  of  bona  fide  transactions  into  money,  for  the 
purpose  of  enabling  production  to  anticipate  the  sale  and  col- 
lection of  the  proceeds  of  the  merchandise  already  put  upon 
the  market.  It  is  the  only  way  in  which  consumption  can  be 
anticipated  ;  in  which  the  producer,  the  moment  he  parts  mth 
his  merchandise,  is  in  the  same  condition  as  he  would  be  after 
his  products  were  sold  and  their  proceeds  paid  over  to  him. 
Where  merchandise  is  sold  on  book  account,  its  consumption 
and  payment  cannot  be  anticipated  by  the  seller.  A  book 
account  is  not  a  proper  subject  for  discount.  He  can  get  his 
money  only  when  the  credit  falls  due.  The  assertion  of  Mill, 
therefore,  that  purchases  made  by  bills  can  exert  no  more 
influence  over  prices  than  purchases  made  by  book  account  is 
directly  opposed  to  the  fact.  It  is  the  notes  of  and  checks 
upon  Banks  which  chiefly,  with  money,  do  act  upon  prices. 
But  to  go  a  step  further :  credits  by  book  account  can  only 
act  upon  the  merchandise  that  is  in  actual  existence,  and  can 
affect  only  that  to  which  they  relate  ;  but  by  means  of  Banks 
moonshine  itself —  accommodation  bills  —  may  be  turned  into 
money.  Now  it  is  impossible  that  such  a  result  could  have 
been  produced  without  the  process  and  instruments  described. 
It  is  demonstrable,  therefore,  that  whatever  may  be  tlie  effect 
of  credit  upon  prices,  the  most  direct  and  potent  of  all  are 
negotiable  instruments,  which  may  or  may  not  represent  capi- 
tal, but  which  exert  as  money  precisely  the  functions  of  a  cur- 
rency of  coin. 


JOHN   STUART   MILL.        "  341 

From  a  convertible,  Mill  proceeds  to  the  discussion  of  an 
inconvertible,  currency. 

"After  experience  bad  sbown  that  pieces  of  paper  of  no  intrinsic 
value,  by  merely  bearing  upon  them  the  written  profession  of  being 
equivalent  to  a  certain  number  of  francs,  dollars,  or  pounds,  could 
be  made  to  circulate  as  such,  and  to  produce  all  the  benefit  to  the 
issuers  which  could  have  been  produced  by  the  coins  they  pur- 
ported to  represent,  governments  began  to  think  that  it  would  be  a 
happy  device  if  they  could  appropriate  to  themselves  this  benefit, 
free  from  the  condition  to  which  individuals  issuing  such  paper 
substitutes  for  money  were  subject,  —  of  giving,  when  required, 
for  the  sign,  the  thing  signified.  They  determined  to  try  whether 
they  could  not  emancipate  themselves  from  this  unpleasant 
obligation,  and  make  a  piece  of  paper  issued  by  them  pass  for  a 
pound,  by  merely  calling  it  a  pound,  and  consenting  to  receive  it 
in  payment  of  the  taxes.  And  such  is  the  influence  of  all  estab- 
lished governments,  that  they  have  generally  succeeded  in  attaining 
this  object.  I  believe  I  might  say  they  have  always  succeeded  for 
a  time  ;  and  the  power  has  only  been  lost  to  them  after  they  had 
compromised  it  by  the  most  flagrant  abuse. 

"  In  the  case  supposed,  the  functions  of  money  are  performed  by 
a  thing  which  derives  its  power  of  performing  them  solely  from  con- 
vention. But  convention  is  quite  sufiicient  to  confer  the  power; 
since  nothing  more  is  needful  to  make  a  person  accept  any  thing  as 
money,  and  even  at  any  arbitrary  value,  than  the  persuasion  that 
it  will  be  taken  from  him  on  the  same  terms  by  others.  The  only- 
question  is  :  What  determines  the  value  of  such  a  currency  ?  since  it 
cannot  be,  as  in  the  case  of  gold  and  silver  (or  paper  exchangeable 
for  them  at  will),  the  cost  of  production. 

"  We  have  seen,  however,  that  even  in  the  case  of  a  metallic 
currency,  the  immediate  agency  in  deteiTnining  its  value  is  its 
quantity.  If  the  quantity,  instead  of  depending  on  the  ordinary 
mercantile  motives  of  profit  and  loss,  could  be  arbitrarily  fixed  by 
authority,  the  value  would  depend  on  the  fiat  of  that  authority,  not 
on  cost  of  production.  The  quantity  of  a  paper  currency  not 
convertible  into  the  metals  at  the  option  of  the  holder  can  be 
arbitrarily  fixed,  especially  if  the  issuer  is  the  sovereign  power  of 
the  State.  The  value,  therefore,  of  such  a  currency  is  entirely 
arbitrary. 

"  Suppose  that,  in  a  country  of  which  the  currency  is  wholly 
metallic,  a  paper  currency  is  suddenly  issued  to  the  amount  of  half 
the  metallic  circulation  ;  not  by  a  banking  establishment,  or  in  the 
form  of  loans,  but  by  the  government,  in  payment  of  salaries  and 
purchase  of  commodities.  The  currency  being  suddenly  increased 
by  one-half,  all  prices  will  rise,  and,  among  the  rest,  the  prices  of  all 
things  made  of  gold  and  silver  ;  an  ounce  of  manufactured  gold 
■will  become  more  valuable  than  an  ounce  of  gold  coin  by  more 
than  the  customary  difference  which  compensates  for  the  value  of 
the  workmanship ;  and  it  will  be  profitable  to  melt  the  coin  for  the 
purpose  of  being  manufactured,  until  as  much  has  been  taken  from 


342  HISTORY   OF    MOXETAEY  THEORIES. 

the  currency  by  the  subtraction  of  gold  as  has  been  added  to  it  by 
the  issue  of  the  paper.  Then  prices  will  relapse  to  what  they  were 
at  first,  and  there  will  be  nothing  changed,  except  that  a  paper  cur- 
rency has  been  substituted  for  half  of  the  metallic  currency  which 
existed  before.  Suppose,  now,  a  second  emission  of  paper  :  the 
same  series  of  effects  will  be  renewed ;  and  so  on,  until  the  whole 
of  the  metallic  money  has  disappeared :  that  is,  if  paper  be  issued 
of  as  low  denomination  as  the  lowest  coin ;  if  not,  as  much  will 
remain  as  convenience  requires  for  the  smaller  payments.  The 
addition  made  to  the  quantity  of  gold  and  silver  disposable  for 
ornamental  purposes  will  somewhat  reduce,  for  a  time,  the  value  of 
the  article  :  and  as  long  as  this  is  the  case,  even  though  paper  has 
been  issued  to  the  original  amount  of  the  metallic  circulation,  as 
much  coin  will  remain  in  circulation  along  with  it  as  will  keep  the 
value  of  the  currency  down  to  the  reduced  value  of  thp  metallic 
material ;  but,  the  value  having  fallen  below  the  cost  of  production, 
a  stoppage  or  diminution  of  the  supply  from  the  mines  will  enable 
the  surplus  to  be  carried  off  by  the  ordinary  agents  of  destruction, 
after  which,  the  metals  and  the  currency  will  recover  their  natural 
value.  "We  are  here  supposing,  as  we  have  supposed  throughout, 
that  the  country  has  mines  of  its  own,  and  no  commercial  inter- 
course with  other  countries  ;  for,  in  a  country  having  foreign  trade, 
the  coin  which  is  rendered  superfluous  by  an  issue  of  paper  is  car- 
ried oH  by  a  much  prompter  method.  Up  to  this,  the  ejects  of  a 
paper  currency  are  substantially  the  same,  whether  it  is  convertible 
into  specie  or  not.  .  .  . 

"  In  order  that  the  value  of  tlie  currency  may  be  secure  from 
being  altered  by  design,  and  may  be  as  little  as  possible  liable  to 
fluctuation  from  accident,  the  articles  least  liable  of  all  known  com- 
modities to  vary  in  their  value  —  the  precious  metals  —  have  been 
made  in  all  civilized  countries  the  standard  of  value  for  the  cir- 
culating medium  ;  and  no  paper  currency  ought  to  exist  of  which 
the  value  cannot  be  made  to  conform  to  theirs.  Nor  has  this 
fundamental  maxim  ever  been  entirely  lost  sight  of,  even  by  the 
governments  which  have  most  abused  the  power  of  creating  incon- 
vertible paper.  If  they  have  not  (as  they  generally  have)  pro- 
fessed an  intention  of  paying  in  specie  at  some  indefinite  future 
time,  they  have  at  least,  by  giving  to  their  pajier  issues  the  names 
of  their  coins,  made  a  virtual,  though  generally  a  false,  profession 
of  intending  to  keep  them  at  a  value  corresponding  to  that  of  the 
coins.  This  is  not  impracticable  even  with  an  inconvertible  paper. 
There  is  not,  indeed,  the  self-acting  check  which  convertibility 
brings  with  it ;  but  there  is  a  clear  and  unequivocal  indication  by 
which  to  judge  whether  the  currency  (inconvertible)  is  depreciated, 
and  to  what  extent.  That  indication  is  the  price  of  the  precious 
metals.  When  holders  of  paper  cannot  demand  coin  to  be  con- 
verted into  bullion,  and  when  there  is  none  left  in  circulation,  bullion 
rises  and  falls  in  price  like  other  things  ;  and  if  it  is  above  the 
mint  price,  —  if  an  ounce  of  gold,  which  would  be  coined  into  the 
equivalent  of  £3  17s.  10^;?.,  is  sold  for  £4  or  £5  in  paper,  —  the  value 
of  the  currency  is  sunk  just  that  much  below  what  the  value  of  a 


JOHN  STUAP.T   :SIILL.  3-43 

metallic  currencv  would  be.  If,  therefore,  the  issue  of  inconvertible 
paper  were  subjected  to  strict  rules,  —  one  rule  being  that,  whenever 
bullion  rose  above  the  mint  price,  the  issues  should  be  contracted 
until  the  market  price  of  bullion  and  the  mint  price  were  again  in 
accordance,  —  such  a  currency  would  not  be  subject  to  any  of  the 
evils  usually  deemed  inherent  in  an  inconvertible  paper. 

"But,  also,  such  a  system  of  currency  would  have  no  advantages 
sufBcient  to  recommend  it  to  adoption.  An  inconvertible  currency 
regulated  bv  the  price  of  bullion  would  conform  exactly,  in  all  its 
variations,  to  a  convertible  one ;  and  the  only  advantage  gained 
would  be  that  of  exemption  from  the  necessity  of  keeping  any 
reserve  of  the  precious  metals ;  which  is  not  a  very  important 
consideration,  especially  as  a  government,  so  long  as  its  good  faith 
is  not  suspected,  needs  not  keep  so  large  a  reserve  as  private  issuers, 
being  not  so  liable  to  great  and  sudden  demands,  since  there  never 
can  be  any  real  doubt  of  its  solvency.  Against  this  small  advan- 
tage is  to  be  set,  in  the  first  place,  the  possibility  of  fraudulent 
tampering  with  the  price  of  bullion,  for  the  sake  of  acting  on  the 
currency," in  the  manner  of  the  fictitious  sales  of  corn,  to  influence 
the  averages,  so  much  and  so  justly  complained  of  while  the  corn 
laws  were^in  force.  But  a  still  stronger  consideration  is  the  im- 
portance of  adhering  to  a  simple  principle,  intelligible  to  the  most 
untaught  capacity.  Everybody  can  understand  convertibility; 
every  one  sees  that  what  can  be  at  any  moment  exchanged  for  five 
pounds  is  worth  five  pounds.  Regulation  by  the  price  of  bullion 
is  a  more  complex  idea,  and  does  not  recommend  itself  through 
the  same  familiar  associations.  There  would  be  nothing  like  the 
same  confidence,  by  the  public  generally,  in  an  inconvertible 
currency  so  regulated  as  in  a  convertible  one  ;  and  the  most  in- 
structed persoiT might  reasonably  doubt  whether  such  a  rule  would 
be  as  likely  to  be  inflexibly  adhered  to.  The  grounds  of  the  rule 
not  being  so  well  understood  by  the  public,  opinion  would  probably 
not  enforce  it  with  as  much  rigidity,  and,  in  any  circumstances  of 
difficulty,  would  be  likely  to  turn  against  it ;  while  to  the  govern- 
ment itself  a  suspension  of  convertibility  would  appear  a  much 
stronger  and  more  extreme  measure  than  a  relaxation  of  what 
might  possibly  be  considered  a  somewhat  artificial  rule.  There  is, 
therefore,  a  great  preponderance  of  reasons  in  favor  of  a  convert- 
ible in  preference  to  even  the  best -regulated  inconvertible  currency. 
The  temptation  to  overissue  in  certain  financial  emergencies  is  so 
strong,  that  nothing  is  admissible  which  can  tend,  in  however 
slightT  a  degree,  to  weaken  the  baiTiers  that  restrain  it."  ^ 

"  After  experience  had.  shown,"  says  Mill,  in  effect,  "  that 
the  inhabitants  of  a  particular  country  could  get  on  just  as 
well,  could  be  just  as  comfortable  and  strong  without  food  and 
clothing  as  with,  governments  began  to  think  it  would  be  a 
happy  device  to  appropriate  to  themselves  the  benefit  of  being 
thus  relieved  from  providing  for  these  two  great  wants ;  and 

i  Political  Economy,  vol.  ii.  pp.  76-78. 


844  HISTORY   OF   MONETARY    THEORIES. 

they  determined  to  try  whether  they  could  not  emancipate 
the  people  from  these  unpleasant  obligations,  by  substituting 
words  or  declarations  or  hieroglyphs  in  place  of  coats  and 
beef;  and  such  is  the  strength  of  combination  or  union,  that 
they  pretty  nearly  succeeded  in  obtaining  their  object.  Indeed, 
they  fully  succeeded  for  a  time,  only  to  lose  their  power  by 
the  flagrant  conduct  of  those  who  went  so  far  as  to  starve  and 
freeze  themselves  to  death.  Convention  was  competent  to 
decide,  and  did  decide,  the  matter ;  but  mankind  were  so 
perverse  that  they  would  not  contain  themselves  within  any 
reasonable  bounds.  A  grand  principle,  therefore,  which  might 
have  revolutionized  societ}^  had,  notwithstanding  all  the  bene- 
fits which  might  have  flowed  from  it,  to  be  abandoned." 

Mill  might  have  used  either  illustration  with  equal  perti- 
nence and  force.  The  value  and  use  of  gold  and  silver  as 
money  was  no  more  a  matter  of  convention  than  the  value  and 
use  of  food  and  clothing.  Money  is  just  as  necessary  to 
society,  as  at  present  constituted,  as  is  food  and  clotliing.  No 
experience  has  ever  shown  that  "  pieces  of  paper  of  no  intrinsic' 
value,  by  merely  bearing  upon  them  written  professions  of 
being  equivalent  to  a  certain  number  of  francs,  dollars,  or 
pounds,  could  be  made  to  circulate  ag  such,  and  produce  all 
the  benefits  to  the  issuers  which  could  have  been  produced  by 
the  coins  which  they  purported  to  represent."  Experience 
never  will  show  such  a  result,  unless,  perchance,  in  a  world 
peopled  wholly  by  Economists.  That  fictions  —  mere  pieces  of 
paper  professing  to  be  the  equivalent  of  coin,  but  representing 
nothing  and  carrying  with  them  no  obligation  whatever  for 
their  payment,  —  cannot  have  the  value  of  coin,  has  been  made 
a  matter  of  demonstration  over  and  over  again.  A  currency 
such  as  Mill  assumes  could  not  even  get  intcf  circulation.  If 
made  legal  tender,  which  he  did  not  contemplate,  then  an 
attribute  of  value  would  be  given  to  it  other  than  that  of  a 
plain  note,  which  was  to  be  his  currency  ;  but  even  the  price 
of  legal-tender  notes  would  soon  come  to  be  measured  by  their 
value.  Men  deal  or  intend  to  deal  in  values,  —  in  substantial 
things,  not  in  shams.  If  they  were  unable  to  make  the 
distinction,  as  Mr.  Mill  assumes,  the  race  itself  would  soon 
cease  to  exist. 

Mill's  method  for  detecting,  and  determining  the  degree  of 
the  depreciation  of  an  inconvertible  currency,  is  this  :  "  When 
the  holders  of  paper  cannot  convert  it  on  demand  into  bullion, 


JOHN   STUART   MILL.  345 

and  when  there  is  no  coin  in  circnhition  by  means  of  which 
bullion  can  be  demanded,  paper  having  driven  it  wholly  out 
of  circulation,  then  bullion  rises  and  falls  in  price  like  other 
things  ;  and,  if  its  value  be  above  the  mint  price  of  gold,  —  if 
an  ounce  of  gold,  which  is  the  equivalent  of  X3  17s.  10c?.,  be 
sold  for  £4  or  .£5  in  paper,  —  the  value  of  the  currency  is  sunk 
just  that  much  below  what  the  value  of  a  metallic  currency 
would  be.  In  such  case,  the  paper  must  be  proportionally 
taken  in.  So  when  all  the  coin  is  driven  out  of  circulation, 
and  <£3  17s.  lOd.  of  irredeemable  paper  will  purchase  an  ounce 
and  a  quarter  of  bullion,  the  paper  is  deficient  in  amount,  and 
its  value,  consequently,  excessive.  The  remed}^  is  a  propor- 
tional increase.  By  observing  such  rules,  the  currency  would 
not  be  subject  to  any  of  the  evils  usually  deemed  inherent  in 
an  inconvertible  paper."  His  statement,  when  reduced  to  its 
proper  terms,  is  this :  "  When  something  exceeds  nothing, 
either  in  quantity  or  value,  the  nothing  is  to  be  divided  by 
two,  the  product  being  equal  to  the  quantity  of  the  some- 
thing :  when  nothing  exceeds  something  in  quantity  or  value, 
it  must  be  multiplied  by  two,  the  product  being  of  the  same 
value  as  the  something."  These  propositions,  which  embody 
in  a  concise  and  accurate  form  Mill's  more  elaborate  state- 
ment, may  well  take  their  place  beside  that  which  assumes 
"the  value  of  money  to  be  in  inverse  ratio  to  its  quantity 
multiplied  by  the  rapidity  of  its  circulation." 

"  Although,"  says  Mill,  in  effect,  "  the  value  of  an  incon- 
vertible currency,  so  long  as  it  does  not  exceed  the  wants  of  a 
community  in  its  exchanges,  might,  by  the  rules  laid  down,  be 
made  to  conform  exactly  to  the  value  of  gold,  it  is  hardly 
worth  while  to  issue  it,  as  the  only  advantage  gained  would  be 
an  exemption  from  the  necessity  of  maintaining  reserves  of 
the  precious  metals,  —  a  matter  of  very  little  importance.  So 
long  as  the  good  faith  of  the  government  issuing  it  was  not 
suspected,  it  would  have  to  keep  on  hand  only  a  very  small 
amount  of  reserve,  even  when  it  undertook  to  issue  a  convert- 
ible currency.  A  million  or  two  of  coin  or  bullion  would 
be  all  that  would  be  required  against  an  issue  of  twenty  millions 
of  notes.  What  is  the  interest  on  such  a  paltry  sum,  set  off 
against  a  possibility  of  tampering  with  the  value  of  bullion  ?  " 
But  the  motive  for  tampering  with  bullion  would  be  when  it 
was  held  as  reserves,  precisely  as  coin  has  been  oftentimes 


346  HISTOEY   OF   3I0NETAEY   THEORIES. 

tampered  with  for  the  purpose  of  enabling  governments  to 
pay  their  debts  at  one-half  the  value  at  which  thev  were  con- 
tracted. There  would  be  no  motive  to  tamper  when  there 
was  no  bullion  to  be  paid.  In  this  case,  MiU  seems,  without 
being  aware  of  it,  to  have  altogether  inverted  his  argument. 
But  a  still  stronger  consideration,  he  says,  is  the  importance 
of  a  rule  which  the  most  untaught  capacity  can  readily  under- 
stand. When  an  issuer  savs,  "  I  will  pay  ten  dollars,  on 
demand,  in  gold,"  the  note  will  be  readily  accepted  so  long  as 
the  maker  is  in  good  credit ;  for  the  holder  knows  that  all  he 
has  to  do  is  to  demand  and  receive  the  gold  for  it,  if  he  have 
occasion  to  use  it,  or  if  he  suspect  any  thing  wrong.  An  -  un- 
taught capacity  "  could  hardly  be  made  to  understand  the  pro- 
cess bv  which  a  note  he  might  hold  could  be  made  to  have  a 
value  equal  to  that  of  gold,  when  not  a  particle  of  gold  could 
be  had  for  it.  So  far  Mill  was  right.  The  regulation  of  the  value 
of  an  inconvertible  currency,  so  as  to  render  it  the  equivalent 
of  gold,  is  a  very  complex  process.  It  Ls  not  illustrated  in  the 
"  ordinary  operations  of  society."  Even  some  well-taught 
people  might  well  doubt  whether  the  rule  would  produce  the 
assumed  result,  or  whether  it  would  be  rigidly  adhered  to. 
Public  opinion  might  not  sufficiently  support  it.  The  govern- 
ment itself  might  recommend  its  relaxation  ;  for,  as  the  object 
of  such  currency  was  to  supply  the  lack  of  gold,  government 
would  not  be  very  likely,  after  its  issue,  to  take  measures  to 
give  it  the  value  of  gold,  when  the  same  measures  would  have 
rendered  its  issue  unnecessary.  This  is  one  of  those  cases  in 
which  it  is  not  wise  to  attempt  to  enforce  a  rule  or  principle 
wholly  correct,  and  of  great  value  in  itself,  simply  from  the 
perversity  or  weakness  of  human  nature. 

"  The  same  effects,"  says  MiU,  "  which  would  arise  from  the  dis- 
covery of  a  treasure  accompany  the  process  by  which  bank-notes, 
or  any  of  the  other  substitutes  for  money,  take  the  place  of  the 
precious  metals.  Suppose  England  possessed  a  currency  wholly 
metallic,  of  twenty  millions  sterling,  and  that  suddenly  twenty 
millions  of  bank-notes  were  sent  into  circulation.  If  these  were 
issued  by  bankers,  they  would  be  employed  in  loans,  or  in  the  pur- 
chase of  securities,  and  would  therefore  create  a  sudden  fall  in  the 
rate  of  interest,  which  would  probably  send  a  great  part  of  the 
twenty  nuEions  of  gold  out  of  the  country  as  capital,  to  seek  a 
higher  rate  of  interest  elsewhere,  before  there  had  been  time  for 
any  action  on  prices.  .  .  . 

"  Effects  of  another  kind,  however,  will  have   been  produced. 


JOHN   STUART   MILL.  347 

Twenty  millions,  which  formerly  existerl  in  the  unproductive  form 
of  metallic  money,  haA'e  been  converted  into  what  is  or  is  capable 
of  becoming  productive  capital.  This  gain  is  at  first  made  by  Eng- 
land at  the  expense  of  other  countries,  who  have  taken  her  super- 
fluity of  this  costly  and  unproductive  article  off  her  hands,  giving 
for  It  an  equivalent  value  in  other  commodities  ;  by  degrees,  the 
loss  is  made  up  to  those  countries  by  diminished  influx  from  the 
mines ;  and,  finally,  the  world  has  gained  a  virtual  addition  of 
twenty  millions  to  its  productive  resources.  ... 

"  The  value  saved  to  the  community  by  thus  dispensing  -with 
metallic  money  is  a  clear  gain  to  those  who  provide  the  substitute. 
They  have  the  use  of  twenty  milUons  of  cii-culating  medium  which 
have  cost  them  only  the  expense  of  an  engraver's  plate.  If  they 
employ  this  accession  to  their  fortunes  as  productive  capital,  the 
produce  of  the  country  is  increased,  and  the  community  benefited 
as  much  as  by  any  other  capital  of  an  equal  amount.  Whether  it 
is  so  employed  or  not,  depends,  in  some  degree,  upon  the  mode  of 
issuing  it.  If  issued  by  the  government,  and  employed  in  paying 
off  debt,  it  would  probably  become  productive  capital.  The  gov- 
ernment, however,  may  prefer  employing  this  extraordinary  re-: 
source  in  its  ordinary  expenses,  may  squander  it  uselessly,  or 
make  it  a  mere  temporary  substitute  for  taxation  to  an  equivalent 
amount ;  in  which  last  case,  the  amount  is  saved  by  the  tax-payers 
at  large,  who  either  add  it  to  their  capital  or  spend  it  as  income."  ^ 

It  seems  that  the  assumption  of  Mill  and  the  Economists, 
that  the  issue  bj  a  country  —  England,  for  example  —  of 
£20.000,000  of  currency,  thereby  enabling  her  to  export  a 
corresponding  amount  of  specie  in  exchange  for  productive 
capital,  increasing  her  wealth  in  an  equal  degree,  might  well  be 
objected  to  from  its  apparent  injustice.  A  principle  applicable 
to  one  should  be  applicable  to  all  other  nations.  That  one  is 
to  be  benefited  without  desert,  and  another  injured  without 
wrong,  is  not  sound  in  morals,  if  it  be  so  in  Political  Economy. 
What  is  to  become  of  the  unfortunate  race  of  Midases  reduced 
to  the  necessity,  not  only  of  eating  and  drinking,  but  of  wear- 
ing gold?  Their  wrongs  and  sufferings  are  certainly  fitted 
to  excite  sincere  commiseration.  Why  should ,  a  coun- 
try known  only  to  the  Economists,  be,  whether  it  will  or  no,  the 
dumping  ground  for  the  gold  of  all  the  rest  of  creation  ?  A 
science  that  is  not  true  for  such  countries  as  England,  France, 
or  the  United  States,  cannot  be  true  for  any  other.  Each 
should  be  compelled  to  keep  its  proper  proportion  of  its  own 
incumbrances  or  impediments,  and  shoidd  not  be  allowed  to 

1  Political  Economy,  vol.  ii.  pp.  174-177. 


848  HISTORY   OF   MONETARY  THEORIES. 

palm  them  off  as  tickets  or  counters,  at  their  nominal  value, 
for  the  good  things  of  others.  How  such  wrong  and  injustice 
are  to  be  prevented  is  not  clear  to  ordinary  understandings. 
It  ought  to  be  to  the  Economists,  who  make  no  ado  of  creat- 
ing something  out  of  nothing.  One  mode  suggests  itself : 
"  As  the  value  of  money  is  inversely  as  its  quantity  multiplied 
by  the  rapidity  of  its  circulation,"  its  value  might  be  reduced 
by  reducing  such  rapidit}^ ;  that  is,  if  one  ounce  of  gold  mov- 
ing at  the  rate  —  an  excessive  one,  perhaps  —  of  ten  feet  per 
second,  be  worth  ten  ounces  moving  at  the  rate  of  only  one 
foot  per  second,  then  if  to  the  quantitj'  ordinarily  in  circulation 
in  England,  and  moving  only  at  the  rate  of,  say,  five  feet  per 
second,  an  equal  amount  were  added,  and  the  movement  of 
the  whole  be  limited  to  two  and  a  half  feet  per  second,  her 
money,  though  doubled  in  quantity,  would  be  no  more  abun- 
dant, relatively,  than  before  ;  and  none  could  be  spared  to  be 
sent  abroad.  There  would  be  nothing  to  complain  of  in  all 
this.  England  might  have  the  misfortune  to  gather  in  too 
much  of  this  unproductive  superfluity;  but  she  should  have 
looked  out  for  it.  She  might,  in  the  same  way,  have  im- 
providently  accumulated  too  much  cloth  and  too  much  iron. 
Political  Econoni}^  is  not  to  allow  her  to  throw  the  loss  upon 
unoffending,  but  less  powerful,  neighbors,  who  had  steered 
clear  of  a  similar  folly.  Mill  admits  that  "  this  gain  is  first 
made  by  England  at  the  expense  of  other  countries,  who  have 
taken  her  superfluity  of  this  costly  and  unproductive  article  off 
her  hands,  giving  for  it  an  equivalent  value  in  other  commod- 
ities ;  "  but  claims  that  "  by  degrees,  however,  the  loss  is  made 
up  to  those  countries  by  diminished  influx  from  the  mines, 
and,  finally,  the  world  has  gained  a  virtual  addition  of 
£20,000,000  to  its  productive  resources"!  But  the  "  other 
countries,"  having  already  their  quota  of  the  precious  metals, 
have  now  a  superfluity  equal  to  the  whole  amount  thrown 
upon  them.  If  England  be  so  much  the  richer,  they  are  so 
much  the  poorer ;  while  the  aggregate  wealth  of  all,  the  world 
over,  is  not,  for  the  present,  increased  a  single  penny.  We 
say  for  the  present ;  for  if,  by  the  above  process,  the  mines  could 
be  closed,  then  the  labor  of  those  who  had  been  unproductively 
employed  might  be  turned  to  some  useful  account.  In  time, 
too,  by  the  loss  and  attrition  of  the  coin  in  circulation,  the 
superfluity  England  had  luckily  got  rid  of  might  be  partly 


JOHN   STUART   MILL.  3-49 

required  in  her  channels  of  circulation.  Twenty  or  thirty,  or, 
perhaps,  fifty  years,  might  be  required  to  bring  about  such  a 
result.  In  the  mean  time,  the  interest  account  running  against 
this  "  unproductive  superfluity  "  might  equal  twice  or  thrice 
its  amount.  Nothing,  therefore,  could  be  gained  to  the  world 
at  large,  while  great  injustice  might  be  done  to  some  of  the 
nations  that  compose  it.  This  should  not  be  allowed.  It 
is  submitted  that  the  Economists  should  reconsider  Mill's 
statement  in  this  particular,  to  see  if  it  cannot  be  placed  upon 
broader  and  more  equitable  foundations. 

So  much  for  Mill's  assumption  that  the  wealth  of  England 
might  be  increased  by  the  substitution  of  worthless  paper  to 
serve  as  currency  in  the  place  of  coin,  and  an  advantage 
secured  in  ratio  thereto.  But  if  the  gold,  demonetized  as  it  were, 
could  be  made  available  for  export,  is  it  certain  that  it  would 
be  exchanged  for  an  equal  value  of  commodities  to  be  made 
the  basis  of  reproduction  ?  The  first  effect  of  the  issue  of 
paper,  even  if  it  were  legal  tender,  would  not  be  to  send 
abroad,  immediately,  a  corresponding  amount  of  gold.  The 
rates  of  exchange  might  be  such  that  it  could  not  be  exported 
without  a  loss.  It  would  only  be  exported  to  discharge 
balances  arising  in  foreign  trade,  to  be  created  in  conse- 
quence of  the  excessive  issues  of  paper.  As  the  effect  of 
such  issues  would  be  to  advance  prices,  an  amount  of  the  gold 
would  still  be  required  as  currency,  in  addition  to  the  paper, 
and  in  ratio  to  such  advance.  From  increased  consumption,  in- 
creased importations  would  be  made,  and  gold  would  be  finally 
exported  in  ratio  thereto.  The  movement,  however,  would 
always  be  gradual,  and  would  be  the  direct,  not  the  indirect, 
effect  of  the  increase  of  the  currency.  Whatever  was  exported 
would  be  for  articles  ordinarily  entering  into  consumption, 
which  exceed  tenfold  such  as  are  imported  to  serve  as  the 
basis  of  production.  It  might  be  that  very  little  would  be 
brought  into  the  country  which  it  could  not  do  as  well  without 
as  with.  Useful  articles,  that  is,  those  which  can  be  made  the 
basis  of  production,  are  not  usually  the  kind  imported  under 
the  stimulus  of  an  issue  of  worthless  paper.  All  such  im- 
provident measures  are  always  followed  by  others  equally  or 
still  more  improvident.  It  is  to  be  remembered  that  all  such  is- 
sues are  made  only  as  the  last  alternative ;  that  they  are  always 


350  HI5TOET   OF   MO^TETAKT  THEORIES. 

tainted  by  the  necessity  of  resorting  to  them.  They  ineyitably 
first  fall  into  the  hands  of  the  creatures  of  the  goyernment,  who 
haye  no  adequate  personal  interest  ia  the  result.  Sellers  of 
merchandise  would,  therefore,  as  a  matter  of  precaution, 
always  demand  a  much  larger  price  in  paper  than  in  coin,  and 
would  always  be  in  a  position  to  exact  their  own  terms.  As  it 
costs  no  more  to  engraye  the  word  **  two  "  than  '"  one."  there 
would  be  no  lack  of  money  so  long  as  it  had  any  exchangeable 
yalue  whateyer.  The  recklessness  of  goyernment  would  soon 
beget  a  corresponding  re^?klessness  and  extrayagance  on  the 
part  of  the  people.  Thrift  does  not  go  hand  in  hand  with 
such  proceedings  as  these.  The  product  of  such  industrial 
operations  as  were  still  carried  on  would  be  at  an  enormously 
high  cost ;  so  that,  when  the  reyerse  came,  —  as  it  would  come 
sooner  or  later,  either  from  an  excessiye  decline  in  the  yalue  of 
the  paper  money  or  from  its  retirement,  —  the  most  as  weU 
as  the  least  deserving  would  be  inyolyed  in  a  common  ruin. 
If  the  curreucy  were  eyer  redeemed,  then  the  gold  driyen  out 
of  the  country  by  its  issue  would  haye  to  be  broug^ht  back.  If 
finally  repudiated,  the  gold  must  still  be  brought  back  to  pro- 
yide  a  new,  or  the  basis  for  a  new,  currency ;  so  that,  in  either 
altematiye.  nothincr  but  loss  could  be  the  result. 


o 


Again :  — 

"  When  metallic  money  has  been  entirely  superseded  and  ex- 
pelled from  circulation  by  the  substitution  of  an  equal  amount  of 
bank-notes,  any  attempt  to  keep  a  still  further  quantity  of  paper  in 
circulation  must,  if  the  notes  are  convertible,  be  a  complete  failure. 
The  new  issue  would  again  set  in  motion  the  same  train  of  con- 
sequences by  which  the  gold  coin  had  already  been  expelled.  The 
metals  would,  as  before,  be  required  tor  exportation,  and  would  be 
for  that  purpose  demanded  from  the  Banks,  to  the  full  extent  of 
the  superfluous  notes,  which  thus  could  not  possibly  be  retained 
in  circulation.  If,  indeed,  the  notes  were  inconvertible,  there 
would  be  no  such  obstacle  to  the  increase  of  their  quantity.  An 
inconvertible  paper  acts  in  the  same  way  as  a  convertible,  while 
there  remains  any  coin  for  it  to  supersede  ;  the  difEerence  begins  to 
manifest  itself  when  all  the  coin  is  driven  from  circulation  (except 
what  may  be  retained  for  the  convenience  of  small  change),  and 
the  issue  still  goes  on  increasing.  TTlien  the  paper  begins  to  exceed 
in  quantity  the  metallic  currency  which  it  superseded,  prices,  of 
course,  rise  ;  things  which  were  worth  £5  in  metallic  money  become 
worth  £6  in  inconvertible  paper,  or  more,  as  the  case  may  be. 
But  this  rise  of  price  will  not.  as  in  the  cases  before  examined, 
stimulate  import  and  discourage  export.       The  imports  and  ex- 


JOHN  STCAET  MILL.  351 

ports  are  determined  by  the  metallic  prices  of  things,  not  by  the 
paper  prices ;  and  it  Ls  only  when  the  paper  is  exchangeable  at 
pleasure  for  the  metals  that  paper  prices  and  metallic  prices  must 
correspond."^ 

"  WTien  metallic  money,"  says  Mr.  Mill,  "  has  been  entirely 
superseded  and  expelled  from  circulation  by  the  substitution 
of  an  equal  amount  of  bank-notes,  any  attempt  to  keep  a  still 
further  quantity  of  paper  in  circulation,  must,  if  the  notes  are 
convertible,  be  a  complete  failure."  Xo  further  issue  of  con- 
vertible paper  can  be  made,  for  the  reason  that  nothing  remains 
into  which  it  can  be  converted.  An  inconvertible  currency, 
he  savs,  produces  precisely  the  effects  of  a  convertible  one,  so 
long  as  there  is  any  coin  in  circulation  to  be  supplanted  or 
displaced  by  either.  The  difference  between  the  two  only 
begins  to  manifest  itself  when  there  is  no  more  coin  to  be 
superseded.  The  issue  of  convertible  currency  must  then 
cease,  while  that  of  an  inconvertible  one  may  still  continue. 
This  statement  is  additional  proof  of  Mr.  Mill's  complete  mis- 
conception of  the  nature  of  paper  money.  Although  aU  con- 
vertible currencies  are  nominally  payable  in  coin,  they  are 
seldom  discharged  in  it.  The  provision  made  for  their  con- 
vertibility is  not  coin,  but  merchandise.  They  must  all  be 
taken  in  by  their  issuers  within  periods,  say,  of  ninety  days. 
Assuming  the  currency  of  all  kinds  afloat  in  Great  Britain  to 
be  .£450,000,000,  the  amount  daily  taken  in,  assuming  the 
period  of  its  circulation  to  be  ninety  days,  is  £5,000,000  ; 
or  assuming  (which  is  nearer  the  mark)  that  its  circuit  is  per- 
formed in  sixtv  davs,  the  amount  dailv  taken  in,  or  converted, 
equals  £7,500,000.  The  whole  amount  of  coin  or  bank-notes 
actuallv  interposing  would  not  exceed  £25,000  in  the  one 
case,  or  £37.500  in  the  other.  All  the  rest  is  taken  in  by 
mutual  offset  of  the  instruments  of  which  it  is  composed. 
The  condition  of  the  circulation  of  such  a  currency  is  not  the 
displacement  of  a  corresponding  amount  of  coin.  No  matter 
what  its  amount,  not  a  penny  less  of  coin  may  be  in  circula- 
tion. It  supplements  the  use  of  coin.  If  it  cause  any  amount 
of  the  latter  to  be  drawn  from  circulation,  it  is  only  that  it 
may  be  collected  into  hoards  as  reserves,  to  discharge  such 
currencv  as  is  not  discharged  by  merchandise.  The  effect  of 
such  a  currency  is  to  reduce  instead  of  advancing  prices,  tak- 

1  Political  Economy,  toI.  ii.  pp.  178,  179. 


352  HISTORY   OF   MONETARY  THEORIES. 

ing  the  whole  range  of  articles  upon  the  market.  Now,  an 
inconvertible  currency,  provided  it  be  legal  tender,  —  for  no 
other  could  ever  get  into  circulation,  —  drives  metallic  money 
out  of  circulation,  for  the  reason  that  it  renders  it  in  great 
measure  superfluous  in  domestic  exchanges.  It  supplants 
instead  of  supplementing  coin  ;  causes  a  rise  in  prices,  in  being 
an  instrument  in  excess  of  the  means  of  expenditure,  or  by 
being  depreciated  in  value  below  that  of  coin.  Mill  asserts, 
that  as  inconvertible  currency  cannot  be  exported,  it  cannot 
stimulate  import  or  discourage  export,  for  the  reason  that  "  im- 
ports and  exports  are  determined  by  the  metallic  prices  of 
things,  not  by  the  paper  prices."  But  as  by  means  of  an 
excessive  issue  of  paper  its  holders  can  command  any  amount 
of  coin,  and  whether  the  coin  be  expelled  or  not,  can  bring  into 
the  country  an  excessive  amount  of  merchandise,  the  additional 
amounts  of  paper  exert  an  influence  over  importations  pre- 
cisely as  would  corresponding  additions  of  gold.  It  is  the 
paper  price,  rather  than  the  gold  price,  of  values  that  deter- 
mines the  amount  of  imports  and  exports.  If  the  paper  price 
of  a  shawl  be  a  thousand  dollars,  and  the  gold  price  five  hun- 
dred, and  if  the  paper  at  the  time  the  order  is  given  can  be 
converted  into  gold  at  sixty  per  cent  of  its  nominal  value,  the 
merchant  will  take  the  risk  of  importing  it,  from  the  apparent 
profit  of  the  transaction,  although,  before  it  is  received,  the 
paper  may  have  fallen  to  forty  per  cent  of  its  nominal  value, 
involving  a  large  loss  instead  of  a  profit.  Every  transaction 
made  with  an  inconvertible  currency  would  always  involve 
the  risk  of  a  loss ;  but  there  would  always  be  plenty  to  assume 
the  risk  of  its  ase.  Mr.  Mill's  assertion,  therefore,  that  it  is  the 
gold,  not  the  paper,  price  by  wliich  exports  and  imports  are 
determined,  is  exactly  opposed  to  the  fact. 

From  the  following  quotations  from  the  chapter  on  the 
"  Regulation  of  the  Currency,"  it  will  be  seen  that  Mill  fully 
agreed  with  Tooke,  that  a  convertible  currency  could  not  be 
issued  in  excess.  They  are  simply  a  reiteration  of  his  assump- 
tion, that  neither  bank-notes  nor  checks  exert  any  influence 
over  prices  or  the  rates  of  exchange  :  — 

"Before  touching  upon  the  practical  provisions  of  Sir  Robert 
Peel's  Act  of  1844,  I  shall  briefly  state  the  nature  and  examine  the 
grounds  of  the  theory  on  which  it  is  founded. 


JOHN  STUART  IVULL.  353 

"  It  is  believed  by  many  that  Banks  of  issue  universally,  or  the 
Bank  of  England  in  particular,  have  a  power  of  throwing  their 
notes  into  circulation,  and  thereby  raising  prices  arbitrarily  ;  that 
this  power  is  only  limited  by  the  degree  of  moderation  with  which 
they  think  fit  to  exercise  it ;  that,  when  they  increase  their  issues 
beyond  the  usual  amount,  the  rise  of  prices  thus  produced  gener- 
ates a  spirit  of  speculation  in  commodities,  which  carries  prices 
still  higher,  and  ultimately  causes  a  reaction  and  recoil,*  amounting 
in  extreme  cases  to  a  couimercial  crisis ;  and  that  every  such  crisis 
which  has  occurred  in  this  country  within  mercantile  memory 
has  been  either  originally  produced  by  this  cause,  or  greatly  ag- 
gravated by  it.  To  this  extreme  length  the  currency  theory  has 
not  been  carried  by  the  eminent  Political  Economists  who  have 
given  to  a  more  moderate  form  of  the  same  theory  the  sanction 
of  their  names.  But  I  have  not  overstated  the  extravagance 
of  the  popular  version,  which  is  a  remarkable  instance  to  what 
lengths  a  favorite  theory  will  hurry,  not  the  closet  students 
whose  competency  in  such  questions  is  often  treated  with  so  much 
contempt,  but  men  of  the  woi-ld  and  of  business,  who  pique  them- 
selves on  the  practical  knowledge  which  they  have,  at  least,  had 
ample  opportunities  of  acquiring.  Not  only  has  this  fixed  idea  of 
the  currency  as  the  prime  agent  in  the  fluctuations  of  price  made 
them  shut  their  eyes  to  the  multitude  of  circumstances  which,  by 
influencing  the  expectation  of  supply,  are  the  true  causes  of  almost 
all  speculations  and  of  almost  all  fluctuations  of  price  ;  but,  in  order 
to  bring  about  the  chronological  agreement  required  by  their  theory 
between  the  variations  of  Bank  issue  and  those  of  prices,  they 
have  played  such  fantastic  tricks  with  facts  and  dates  as  would  be 
thought  incredible,  if  an  eminent  practical  authority  had  not  taken 
the  trouble  of  meeting  them,  on  the  ground  of  mere  history,  with 
an  elaborate  and  systematic  exposure.  I  refer,  as  all  conversant 
with  the  subject  must  be  aware,  to  Mr.  Tooke's  '  History  of 
Prices.'  The  results  of  Mr.  Tooke's  investigations  were  thus 
stated  by  himself  on  his  examination  before  the  Commons  Com- 
mittee on  the  Bank  charter  question,  in  1832,  and  the  evidences  of 
it  stand  recorded  in  his  book.  'In  point  of  fact  and  historically, 
as  far  as  my  researches  have  gone,  in  every  signal  instance  of  a  rise 
or  fall  in  prices,  the  rise  or  fall  has  preceded,  and  therefore  could 
not  be  the  effect  of,  an  enlargement  or  contraction  of  the  Bank 
circulation.' 

"  The  extravagance  of  the  currency  theorists,  in  attributing 
almost  every  rise  or  fall  of  prices  to  an  enlargement  or  contraction 
of  the  issues  of  bank-notes,  has  raised  up,  by  reaction,  a  theory  the 
extreme  opposite  of  the  former,  of  which,  in  scientific  discussion, 
the  most  prominent  representatives  are  Mr.  Tooke  and  Mr.  Fullar- 
ton.  This  counter  theory  denies  to  bank-notes,  so  long  as  their 
convertibility  is  maintained,  any  power  whatever  of  raising  prices, 
and  to  Banks  any  power  of  increasing  their  circulation,  except  as 
a  consequence  of,  and  in  proportion  to,  an  increase  of  the  business 
to  be  done.  This  last  statement  is  supported  by  the  unanimous 
assurances  of  all  the  country  bankers  who  have  been  examined  be- 

23 


354  HISTORY  OF  MONETARY  THEORIES. 

fore  successive  Parliamentary  Committees  on  the  subject.  They  all 
bear  testimony,  that  (in  the  words  of  Mr.  Fullarton)  '  tlie  amount  of 
their  issues  isesclusively  regulated  by  the  extent  of  local  dealings 
and  expenditures  in  their  respective  districts,  fluctuating  with  the 
fluctuations  of  production  and  price  ;  and  that  they  neither  can  in- 
crease their  issues  beyond  the  limits  which  the  range  of  such  deal- 
ings and  expenditures  prescribes,  without  the  certainty  of  having 
their  notes  immediately  returned  to  them,  nor  diminish  them,  but 
at  an  almost  equal  certainty  of  the  vacancy  being  filled  up  from 
some  other  source.'  From  these  premises,  it  is  argued  by  Mr. 
Tooke  and  Mr.  Fullarton,  that  Bank  issues,  since  they  cannot  be 
increased  in  amount,  unless  there  be  an  increased  demand,  cannot 
possibly  raise  prices,  cannot  encourage  speculation,  nor  occasion  a 
commercial  crisis  ;  and  that  the  attempt  to  guard  against  that  evil 
by  an  artificial  management  of  the  issue  of  notes  is  of  no  effect 
for  the  intended  purpose,  and  liable  to  produce  other  consequences 
extremely  calamitous. 

"  As  much  of  this  doctrine  as  rests  upon  testimony,  and  not 
upon  inference,  appears  to  me  incontrovertible,  I  give  complete 
credence  to  the  assertion  of  the  countrj-  bankers,  very  clearly  and 
correctly  condensed  into  a  small  compass  in  the  sentence  just 
quoted  from  ]Mr.  Fullarton.  I  am  convinced  that  they  cannot 
possibly  increase  their  issue  of  notes  in  any  other  circumstances 
than  those  which  are  there  stated.  I  believe,  also,  that  the  theory 
grounded  by  Mr.  Fullarton  upon  this  fact  contains  a  large  portion 
of  truth,  and  is  far  nearer  to  being  the  expression  of  the  whole 
truth  than  any  form  whatever  of  the  currency  theory."  ^ 

After  what  has  preceded,  the  following  quotations  require 
no  comment.  They  relate  to  the  question  of  "  plurality  of 
issue  " ;  — 

"  There  remain  two  questions  respecting  a  bank-note  currency, 
which  have  also  been  a  subject  of  considerable  discussion  of  late 
years :  whether  the  privilege  of  providing  it  should  be  confined  to 
a  single  establishment,  such  as  the  Bank  of  England,  or  a  plurality 
of  issuers  should  be  allowed ;  and,  in  the  latter  case,  whether  any 
peculiar  precautions  are  requisite  or  advisable  to  protect  the 
holders  of  notes  against  losses  occasioned  by  the  insolvency  of  the 
issuers. 

"  The  course  of  the  preceding  speculations  has  led  us  to  attach 
so  much  less  of  peculiar  importance  to  bank-notes,  as  compared 
with  other  forms  of  credit,  than  accords  with  the  notions  generally 
current,  that  questions  respecting  the  regulation  of  so  very  small  a 
part  of  the  general  mass  of  credit  cannot  appear  to  us  of  such 
momentous  import  as  they  are  sometimes  considered.  Bank-notes, 
however,  have  so  far  a  real  peculiarity,  that  they  are  the  only  form 
of  credit  sufficiently  convenient  for  all  the  purposes  of  circulation, 
to  be  able  entirely  to  supersede  the  use  of  metallic  money  for  internal 

^  Political  Economy,  toI.  ii.  pp.  195-197. 


JOHN   STUART   MILL.  355 

purposes.  Although  the  extension  of  the  use  of  checks  has  a  ten- 
dency more  and  more  to  diminisli  the  number  of  bank-notes,  as  it 
would  that  of  the  sovereigns  or  other  coins  which  would  take  their 
place  if  they  were  abolished,  there  is  sure,  for  a  long  time  to  come, 
to  be  a  considerable  supply  of  them,  wherever  the  necessary  degree 
of  commercial  confidence  exists  and  their  free  use  is  permitted.  The 
exclusive  privilege,  therefore,  of  issuing  them,  if  reserved  to  the 
government  or  to  some  one  body,  is  a  source  of  great  pecuniary 
gain.  That  this  gain  should  be  obtained  for  the  nation  at  large  is 
both  practicable  and  desirable  ;  and,  if  the  management  of  a  bank- 
note currency  ought  to  be  so  completely  mechanical,  so  entirely  a 
thing  of  fixed  rule,  as  it  is  made  by  the  Act  of  1844,  there  seems 
no  reason  why  this  mechanism  should  be  worked  for  the  profit  of 
any  private  issuer  rather  than  for  the  public  treasury.  If,  however, 
a  plan  be  preferred  which  leaves  the  variations  in  the  amount  of 
issues  in  any  degree  whatever  to  the  discretion  of  the  issuers,  it  is 
not  desirable  that  to  the  ever-growing  attributions  of  the  govern- 
ment so  delicate  a  function  should  be  superadded  ;  and  that  the 
attention  of  the  heads  of  the  State  should  be  diverted  from  larger 
objects  by  their  being  besieged  with  the  applications,  and  made  a 
mark  for  all  the  attacks,  which  are  never  spared  to  those  deemed 
responsible  for  any  acts,  however  minute,  connected  Avith  the 
regulation  of  the  currency.  It  would  be  better  that  Treasury  notes, 
exchangeable  for  gold  on  demand,  should  be  issued  to  a  fixed 
amount,  not  exceeding  the  minimum  of  a  bank-note  currency  ;  the 
remainder  of  the  notes  which  may  be  required  being  left'  to  be 
supplied  either  by  one  or  by  a  number  of  private  banking  establish- 
ments. Or  an  establishment  like  the  Bank  df  England  might 
supply  the  whole  country,  on  condition  of  lending  fifteen  or 
twenty  millions  of  its  notes  to  the  government,  without  interest ; 
which  would  give  the  same  pecuniary  advantage  to  the  State  as  if 
it  issued  that  number  of  its  own  notes."  ^ 

The  preceding  extracts  present  adequately  the  views  of 
Mr.  Mill  and  his  method  upon  the  subject  of  money.  To 
quote  and  comment  further  would  be  to  go  over  again  the 
ground  already  many  times  retraced.  It  is  doubtful  whether 
modern  literature  presents  a  more  striking  example  of  un- 
warranted assumption  on  one  side,  and  impotent  conclusion 
on  the  other.  He  has  all  the  vices  of  the  Scotch  school,  with- 
out their  excuse.  The  emancipation,  however  partial,  of  the 
English  intellect  preceded  by  a  considerable  period  that  of  the 
Scotch.  It  was,  however,  inevitable  that  the  English  as  well 
^s  Scotch  Economists  should  make  disastrous  failure,  from  a 
total  misconception  of  the  principles  upon  which  the  science  of 
Political  Economy,  if  there  be  such,  must  rest,  and  of  the 

1  Political  Economy,  vol.  ii.  pp.  220,  221. 


356  HISTORY   OF    MONETARY   THEORIES. 

methods  by  which  every  science  is  to  be  pursued.  If  it  be 
the  object  of  Political  Economy  to  unfold  the  laws  by  which 
nations  or  communities  are  enriched,  its  first  and  obvious  step 
would  be  a  study  of  the  most  striking  examples  of  the  kind 
wliich  history  affords.  A  signal  one  is  that  of  the  Hebrew 
race.  Their  great  Law-giver  enjoined  morality  as  the  highest 
condition  of  material  welfare.  "  Obey  the  law,  and  you  shall 
have  gold  and  silver  and  cattle  and  possessions  as  you  do 
obey  it."  The  result  in  their  case  established  the  value  of 
morality  as  an  essential  condition  of  wealth ;  for  this  race  has 
throughout  history  been  alike  conspicuous  for  its  morality  and 
wealth.  But  morality  may  be  wholly  wanting  in  that  neces- 
sary for  its  own  preservation.  The  lawfulness,  and  consequent 
morality,  of  slavery  was  recognized  by  all  ancient  codes, 
although  it  tended  to  the  destruction  of  all  virtue  and  all 
material  welfare.  Hence  the  need  of  a  rule  or  principle  by 
which  morals  themselves  may  be  enlightened  and  guided,  and 
conduct  subjected  to  a  sense  of  duty,  —  to  a  law  higher  than 
that  of  human  enactment.  Such  a  principle  or  sense  abolishes 
slavery,  and  so  becomes  a  far  more  potent  force  than  morality 
itself.  Without  it,  all  the  obligations  that  morality  can  impose 
can  never  maintain  society  at  its  proper  level  and  bent.  This 
proposition,  then,  being  established,  the  next  question  arises, 
Where  is  the  most  perfect  expression  of  this  principle  to  be 
found  ?  History  points  to  the  teachings  of  Christ.  We  must 
weigh  and  estimate  all  teachings  by  their  results.  If  Chris- 
tianity, as  a  principle,  appear  to  have  exerted  a  more  powerful 
influence  over  the  race  than  any  other  statement  or  revelation 
of  the  kind ;  if  it  attack  more  effectually  than  any  other  the 
wrongs  and  vices  which  afflict  society,  and  if  by  its  observance 
the  greatest  degree  of  material  prosperity  be  secured,  —  then 
the  record  of  its  teachings  should  become,  as  it  were,  the 
primer  of  the  Political  Economist.  The  conclusion  seems  to 
be  irresistible.  Christianity  is  not  a  dogma  nor  a  system  :  these 
are  conditions  imposed  upon  and  foreign  to  it.  It  is  secular  at 
the  same  time  that  it  is  religious.  It  forbids  an  act  like  the 
expulsion  of  the  Moors  from  Spain,  and  the  revocation  of  the 
Edict  of  Nantes,  as  wrongs  done  as  much  to  the  material  as 
to  the  moral  welfare  of  the  authors  of  those  monstrous  crimes. 
As  ethnic  religions  have  no  proper  sense  of  the  infinite  im- 
morality and  improvidence  of  such  acts,  the  necessity  for  a 


MORAL   LAWS   THE   BASIS    OF   ECOXOISnC    SCIENCE.       357 

higher  rule  for  their  guidance  and  control  is  at  once  apparent. 
Moral  and  material  prosperity  must  always  go  hand  in  hand  ; 
but  as  the  idea  or  intent  must  always  precede  the  act,  and  as 
every  act  must  be  followed  by  its  appropriate  sequence  or 
reward,  the  first  thing  always  to  be  considered  is  the  germ, 
the  motive,  that  led  to  it.  Political  Economy,  therefore,  as  a 
science,  if  it  be  such,  must  include  in  its  range  every  motive 
and  principle  that  can  influence  human  action,  as  well  as  every 
method  or  law  of  human  progress  or  acquisition.  That  "  the 
meek  shall  inherit  the  earth  "  was  not  stated  as  a  matter  of  senti- 
ment, —  as  compensation  for  losses,  sufferings  endured,— ^but  as 
illustrating  the  power  resulting  from  proper  spiritual  conditions, 
—  conditions  through  w^hich  the  best  gifts  of  Providence, 
material  as  well  as  moral,  come  to  the  race.  It  may  3^0 1  be 
seen  that  the  injunction  to  give  the  coat  where  the  cloak  is 
taken  expresses  a  principle  most  perfectly  calculated  for  the 
protection  of  property,  although  its  higher  meaning  may  not 
yet  have  penetrated  this  "muddy  vesture  of  decay."  The 
Economists  have  not  even  comprehended  the  grounds  upon 
which  the  science,  if  there  be  such,  must  rest.  They  begin  by 
erecting  their  petty  postulates,  which  partake  of  their  own 
weakness  ;  and  from  these  proceed  to  deduce  the  law  of  human 
life  and  progress,  and  even  the  nature  of  the  Supreme  Being 
himself.  As  the  postulates  of  each  necessarily  exj)ress  the 
peculiarities  of  each,  the  result  is  universal  chaos  of  opinion 
and  statement,  without  any  possible  means  or  stand-point  for 
reconciliation.  Mr.  Mill,  the  great  apostle  of  the  modern 
school,  expressed  its  condition  when  he  declared  that  Adam 
Smith,  the  great  apostle  of  the  old,  "is  in  many  respects 
obsolete  ;  in  all,  imperfect."  Principles,  certainly,  cannot  be- 
come obsolete  ;  and,  if  Smith  have  become  so,  it  is  only  because 
he  was  wanting  in  them.  Each  one  has  his  own  system  ;  and 
if  he  borrow  any  thing  from  another,  it  is  always  with  a  quali- 
fication to  show  his  own  superiority.  They  have  all  moved  so 
long  in  their  little  spheres,  without  once  seeking  wisdom  from 
a  source  higher  than  their  own,  that  the  race  has  become 
efi'ete,  not  a  few  of  them  being  only  a  little  removed  from  a 
condition  of  mental  imbecility. 

An    illustration,  perhaps  still  more  striking  and  pertinent 
than  that  afforded    by  the   Hebrews,  of  the  dependence  of 


358  HISTOEY   OF    MONETARY   THEOEIES. 

material  prosperity  upon  morals,  or  upon  a  principle  far  higher 
than  morals,  is  that  afforded  by  the  Seven  United  Provinces. 
Their  territory  was  made  up  of  marshy  and  sandy  wastes,  ex- 
posed to  constant  overflow  from  the  great  rivers  which  traversed 
them,  and  the  still  more  terrible  invasion  of  the  sea.  Before  the 
beginning  of  our  era,  Julius  Csesar  describes  its  inhabitants,  the 
Batavians,  as  addicted  to  a  seafaring  life,  and  as  relying  upon 
their  fisheries  for  the  greater  part  of  their  subsistence.  Their 
country  itself,  before  it  could  be  made  to  contribute  in  any 
considerable  degree  to  their  support,  had  first  to  be  reclaimed 
by  mounds  and  dykes,  only  to  be  reared  at  vast  expense  and 
labor.  The  territory  was  almost  wholly  wanting  in  forests,  so 
that  all  the  material  for  their  ships,  even,  had  to  be  brought 
from  other  lands.  After  the  reclamation  of  their  country, 
their  food  had  always,  in  great  measure,  to  be  imported.  The 
sea  was  both  their  element  and  their  resource.  This  swarmed 
with  fish,  particularly  herring  ;  the  mode  of  curing  and  pre- 
serving which  was  fortunately  discovered  by  an  inhabitant 
named  Beukels  or  Beukelzoon,  about  the  middle  of  the  four- 
teenth century.  At  that  time,  the  eating  of  butcher's  meat 
during  two  days  each  week,  and  forty  days  before  Easter,  was 
forbidden  by  a  dogma  of  the  church.  As  its  place  had  to  be 
supplied  by  some  other  kind  of  animal  food,  tliis  prohibition 
opened  a  market,  at  liighly  remunerative  rates,  for  all  the  fish 
that  could  be  taken.  From  the  time  of  the  discovery  of  Beu- 
kels, therefore,  the  Hollanders  had  open  before  them  the 
richest  mine  as  it  were,  the  greatest  opportunity  that  ever 
presented  itself  to  an  adventurous,  painstaking  people.  Their 
position,  their  nautical  skill,  together  with  their  art  of  pre- 
serving fish,  gave  them,  for  centuries,  the  monopoly  of  supply- 
ing the  Christian  world.  The  result  equalled  the  opportunity. 
They  became  the  richest  and  most  commercial  people  in  the 
world.  Their  wealth  was  soon  turned  to  political  account 
by  the  power  possessed  by  the  Hanseatic  League,  of  which 
several  of  their  cities  were  important  members.  In  1477, 
Philip  of  Burgundy  wrote  to  the  Pope  that,  "  Holland  and 
Zealand  are  rich  islands  inhabited  by  a  brave  and  warlike 
people,  who  have  never  been  conquered  by  their  neigh- 
bors, and  who  prosecute  their  commerce  in  every  sea." 
"  These  people,"  said  Sir  Walter  Raleigh,  "  are  never  with- 
out 700,000  quarters  of  corn,  none  of   it  the  growth  of  the 


THE  EXAMPLE   OF   HOLLAND.  359 

country ;  and  a  dearth  of  only  one  year  in  any  other  part  of 
EuroiDc  enriches  Holland  for  seven  years.  In  the  course  of  a 
year  and  a  half,  during  a  scarcity  in  England,  there  were 
carried  away,  from  the  ports  of  Southampton,  Bristol,  and 
Exeter  alone,  nearly  £200,000  ;  and,  if  London  and  the  rest  of 
England  be  included,  there  must  have  been  £2,000,000  more." 
The  celebrated  John  de  Witt  estimated  that  every  fifth  person 
in  Holland,  at  the  middle  of  the  seventeenth  century,  derived 
his  subsistence  from  the  herring  fishery ;  which  employed,  at 
that  time,  3,000  vessels  in  the  bays  and  inlets  of  their  own 
coast,  800  in  the  seas  around  the  Orkney  and  Shetland  Llands, 
and  1,600  upon  the  coast  of  England.  Including  the  vessels 
employed  in  the  carriage  of  salt  to  be  used  in  preserving  the 
fish,  and  those  employed  in  its  distribution  to  consumers,  the 
whole  number  of  ships  to  which  their  fisheries  gave  employ- 
ment equalled  6,400,  manned  by  112,000  seamen.  The  whole 
number  of  persons  employed  in  the  fisheries  and  dependent 
upon  them  for  support,  including  those  employed  in  building, 
rigging  and  fitting  out  ships,  with  provisions,  nets,  casks,  salt, 
&c.,  numbered  450,000.  "  At  that  time,"  says  De  Witt,  "  Hol- 
land could  boast  .of  10,000  sail  of  shipping,  and  168,000  sea- 
men ;  "  "  although,"  he  adds,  "  the  country  itself  affords  them 
neither  materials,  victual,  nor  merchandise."  In  1690,  Sir 
William  Petty  estimated  the  shii^ping  of  Europe  at  about 
2,000,000  tons  :  namely,  England,  500,000  ;  France,  100,000 ; 
Hamburg,  Sweden,  Denmark,  and  Dantzic,  250,000  ;  Spain, 
Portugal,  and  Italy,  250,000  ;  and  Holland  (the  Seven  United 
Provinces),  900,000,  or  nearly  one-half  of  the  whole.  "  Hol- 
land," said  Sir  William  Temple,  "  did  not  grow  rich  by  any 
native  commodities,  but  by  the  force  of  industr}^ ;  by  the 
improvement  and  manufacture  of  all  foreign  growths ;  by 
being  the  general  magazine  of  Europe,  and  furnishing  all  parts 
with  whatever  the  market  wants  or  invites  ;  and  by  their 
seamen  being,  as  they  have  been  properly  called,  the  common 
carriers  of  the  world."  Each  city  was  distinguished  by  some 
special  trade  it  carried  on,  or  country  with  wliich  it  dealt. 
Middleburgh  was  chiefly  concerned  in  the  wine  trade  ;  Flush- 
ing, in  that  of  the  West  Indies  ;  Swaardam,  in  ship-building  ; 
Sluys,  in  the  herring  fishery  ;  and  Amsterdam,  in  the  East 
India,  Spanish,  and  Mediterranean  trades.  The  prosperity  of 
all,  however,  was  based  upon  the  fisheries  :  it  became  a  com- 


360  HISTOUY   OF   MONETAHY  THEOEIES. 

mon  saying  with  them,  that  the  foundation  of  their  chief  city, 
Amsterdam,  was  laid  on  herring  bones. 

It  is  unnecessary  to  remark  that,  during  all  this  period,  Hol- 
land was  eminently  a  free  State.  The  supreme  government  was 
vested  in  the  "  Assembly  of  the  States,"  which  met  whenever 
occasion  required ;  and  without  whose  consent  no  taxes  could 
be  imposed,  nor  wars  entered  upon,  nor  treaties  nor  alliances 
concluded.  That  country  was  almost  the  only  part  of  West- 
ern Europe  never  subdued  by  the  Roman  empire,  and  never 
affected  by  its  corruptions  and  superstitions ;  or  the  still 
grosser  ones  of  the  empire  which  succeeded.  She  opposed  as 
dauntless  a  front  to  the  second  as  to  the  first,  and  contributed, 
in  her  long  and  desperate  struggle  with  Spain,  more  than  any 
other  people  to  break  that  power  ;  for  in  that  struggle  Spain 
was  but  an  instrument  in  the  hands  of  a  will  higher  than  her 
own.  In  that  struggle,  a  people  not  two  millions  in  number, 
proved  more  than  a  match  for  the  greatest  monarchy  in  Europe, 
and  reduced  it  from  the  highest  to  the  lowest  rank  among  the 
nations.  With  the  progress  of  other  countries,  however,  — 
particularly  that  of  England,  —  it  was  inevitable  that  Holland 
should  lose  the  monopoly  she  once  enjoyed,  and  should  decline 
relatively  in  the  scale.  The  wars  in  which  she  was  exposed 
imposed  upon  her  a  large  debt,  which  weighed  upon  her  indus- 
tries, and  all  the  more  so  as  she  was  compelled  to  divide  with 
others  the  monopoly  which  she  had  so  long  enjoyed.  After 
the  peace  of  Aix-la-Chapelle,  in  1748,  the  attention  of  the 
nation  was  directed  to  the  decline  of  its  shipping,  and  of  its 
foreign  commerce  ;  and  a  circular  was  addressed  to  the  leading 
merchants  of  the  republic,  by  the  Stadtholder,  William  IV., 
desiring  answers  to  the  following  questions:  — 

"  1.  What  is  the  actual  state  of  trade?  And,  if  the  same  should 
be  found  to  be  diminished  and  fallen  to  decay,  then,  — 

"  2.  To  inquire  by  what  methods  the  same  may  be  supported 
and  advanced,  or,  if  possible,  restored  to  its  former  lustre,  repute, 
and  dignity  ?  " 

« 

To  these  inquiries,  numerous  answers  were  received,  wliich, 
by  the  direction  of  the  Stadtholder,  were  embodied  in  a  report 
or  memoir,  in  which  the  former  prosperity  of  the  country  was 
referred  to  three  causes  :  1.  Physical  or  natural ;  2.  Moral ; 
3.  Adventitious  or  external.  Their  operation  and  result  were 
set  out  in  detail  as  follows  :  — 


THE   EXAilPLE   OF   HOLLAND.  361 

"  I.  The  natural  and  physical  causes  are  the  advantages  of  the 
situation  of  the  country,  —  on  the  sea,  and  at  the  moutli  of  consider- 
able rivers  ;  its  situation  between  the  northern  and  southern  parts, 
which,  by  being  in  a  manner  the  centre  of  all  Europe,  made  the 
RepuVdic  become  the  general  market  where  the  merchants  on  both 
sides  used  to  bring  their  superfluous  commodities,  in  order  to 
barter  and  exchange  the  same  for  other  goods  they  wanted. 

"  Nor  have  the  barrenness  of  the  country,  and  the  necessities  of 
the  natives  arising  from  that  cause,  less  contributed  to  set  them 
upon  exerting  all  their  ap))lication,  industry,  and  utmost  stretch  of 
genius,  to  fetch  from  foreign  countries  what  they  stand  in  need  of 
in  their  own,  and  to  support  themselves  by  trade. 

"  The  abundance  of  fish  in  the  neighboring  seas  put  them  in  a 
condition  not  only  to  supply  their  own  occasions,  but  with  the 
overplus  to  carry  on  a  trade  with  foreigners,  and  out  of  the  prod- 
uce of  the  fishery  to  find  an  equivalent  for  wliat  they  wanted 
through  the  sterility  and  narrow  boundaries  and  extent  of  their 
own  country, 

"  II.  Among  the  moral  and  political  causes  are  to  be  placed  the 
unalterable  maxim  and  fundamental  law  relating  to  the  free  exercise 
of  different  religions ;  and  always  to  consider  this  toleration  and 
connivance  as  the  most  effectual  means  to  draw  foreigners  from 
adjacent  countries  to  settle  and  reside  here,  and  so  become  instru- 
mental to  the  peopling  of  these  provinces. 

"  The  constant  policy  of  the  Re]iublic  to  make  this  country  a  per- 
petual safe  and  secure  asylum  for  all  persecuted  and  oppressed 
strangers  ;  no  alliance,  no  treaty,  no  regard  for,  or  solicitation  of 
any  potentate  whatever,  has  at  any  time  been  able  to  weaken  or 
destroy  this  law,  or  make  the  State  recede  from  protecting  those 
who  have  fled  to  it  for  their  own  security  and  self-preservation. 

"  Throughout  the  whole  course  of  the  persecutions  and  oppres- 
sions that  have  occurred  in  other  countries,  the  steady  adherence 
of  the  Republic  to  this  fundamental  law  has  been  the  cause  that 
many  people  have  not  only  fled  hither  for  refuge,  with  their  whole 
stock  in  ready  cash  and  their  most  valuable  effects,  but  have  also 
settled,  and  established  many  trades,  fabiics,  manufactories,  arts, 
and  sciences  in  this  countrv,  notwithstanding  the  first  materials  for 
the  said  fabrics  and  manufactories  Were  wholly  wanting  in  it,  and 
not  to  be  procured  but  at  great  expense  from  foreign  parts. 

"  The  constitution  of  our  form  of  government,  and  the  liberty  thus 
accruing  to  the  citizen,  are  further  reasons  to  which  the  growth  of 
trade  and  its  establishment  in  the  Republic  may  fairly  be  ascribed  ; 
and  all  her  policy  and  laws  are  put  upon  such  an  equitable  footing 
that  neither  life,  estates,  nor  dignities  depend  on  the  caprice  or 
arbitrary  power  of  any  single  individual ;  nor  is  there  any  room 
for  any  person,  who  by  care,  frugality,  and  diligence  has  once 
acquired  an  afiluent  fortune  or  estate,  to  fear  a  deprivation  of  them 
by  any  act  of  violence,  oppression,  or  injustice. 

"  The  administration  of  justice  in  the  country  has,  in  like  man- 
ner, always  been  clear  and  impartial,  and  without  distinction  of 
superior  or  inferior  rank,  —  whether  the  parties  have  been  rich  or 


362  HISTORY   OF   MOXETARY   THEORIES. 

poor,  or  were  this  a  foreigner  and  that  a  native  ;  and  it  were 
greatly  to  be  wished  we  could  at  this  day  boast  of  such  impartial 
quickness  and  despatch  in  all  our  legal  processes,  seeing  how 
great  an  influence  it  has  on  trade. 

"  To  sum  up  all :  amongst  the  moral  and  political  causes  of  the 
former  flourishing  state  of  trade  may  be  likewise  placed  the  wis- 
dom and  prudence  of  the  administration  ;  the  intrepid  firmness  of 
the  councils  ;  the  faithfulness  with  which  treaties  and  engagements 
were  wont  to  be  fulfilled  and  ratified  ;  and,  particularly,  the  care 
and  caution  practised  to  preserve  tranquillity  and  peace,  and  to 
decline,  instead  of  entering  on  a  scene  of  war,  merely  to  gratify 
the  ambitious  views  of  gaining  fruitless  or  imaginary  conquests. 

"  By  these  moral  and  political  maxims  was  the  glory  and  repu- 
tation of  the  Republic  so  far  spread,  and  foreigners  animated  to 
place  so  great  a  confidence  in  the  steady  determinations  of  a  State 
so  wisely  and  prudently  conducted,  that  a  concourse  of  them 
stocked  this  country  with  an  augmentation  of  inhabitants  and 
useful  hands,  whereby  its  trade  and  opulence  were  from  time  to 
time  increased. 

"  III.  Amongst  the  adventitious  and  external  causes  of  the  rise 
and  flourishing  state  of  our  trade  may  be  reckoned  :  — 

"  That  at  the  time  when  the  best  and  wisest  maxims  were 
adopted  in  the  Republic  as  the  means  of  making  trade  flourish, 
they  were  neglected  in  almost  all  other  countries ;  and  any  one 
reading  the  history  of  those  times  may  easily  discover  that  the 
persecutions  on  account  of  religion  throughout  Spain,  Bi-abant, 
Flanders,  and  many  other  Stated  and  kingdoms,  have  powerfully 
promoted  the  establishment  of  commerce  in  the  Republic. 

"  To  this  happy  result,  and  the  settling  of  manufacturers  in  our 
countr)-,  the  long  continuance  of  the  civil  wars  in  France,  which 
were  afterwards  carried  on  in  Germany,  England,  and  divers  other 
parts,  have  also  very  much  contributed. 

"  It  must  be  added,  in  the  last  place,  that,  during  our  most 
burdensome  and  heavy  wars  with  Spain  and  Portugal  (however 
ruinous  that  period  was  for  commerce  otherwise),  these  powers 
had  both  neglected  their  navy,  whilst  the  navy  of  the  Republic,  by 
a  conduct  directly  the  reverse,  was  at  the  same  time  formidable, 
and  in  a  capacity  not  only  to  protect  the  trade  of  its  own  subjects, 
but  to  annoy  and  crush  that  of  their  enemies  in  all  quarters." 

The  preceding  extracts  contain  more  wisdom,  and  present 
more  accurately  the  laws  that  govern  the  acquisition  and  pres- 
ervation of  wealth,  than  all  the  books  on  Political  Economy 
ever  written.  They  contain,  in  fact,  all  that  is  necessary  to 
be  known  to  reach  the  highest  pitch  of  material  greatness. 
Patient  industry,  religious  toleration,  the  acknowledgment 
and  sense  of  a  law  higher  than  any  of  man's  provision,  and 
exact  justice  and  good  faith  in  dealing  with  others,  are  certain 
to  receive  the  highest  benediction  and  reward  that  Providence 


H.  D.   MACLEOD.  363 

can  bestow.  Among  a  people  by  whom  such  virtues  were 
cultivated,  the  Political  Economist  would  have  been  as  super- 
fluous and  as  much  out  of  place  as  a  fortune-teller. 

The  strange  contrast  to  this  picture  is  to  be  equally  heeded, 
if  the  true  method  of  human  progress  would  be  fidly  learned. 
It  was  the  want  of  that  which  raised  Holland  to  the  highest 
pitch  of  prosperity  that  reduced  Spain  to  the  lowest  abyss  of  im- 
potence and  decay.  The  latter  should  have  learned  to  correct 
and  abate  dogma  by  reference  to  the  material  result.  The 
religious  must  be  summoned  to  plead  at  the  bar  of  the  secular, 
as  the  secular  at  the  bar  of  the  religious.  They  must  mutually 
correct  the  vices  and  excesses  of  each  other.  A  nation  or  peo- 
ple who  cannot  do  this  is  far  gone  in  the  downward  road,  to 
fall  an  easy  victim  to  the  higher  powers  that  surround  it,  which 
are  as  remorseless  and  inexorable  as  the  laws  of  nature  itself.^ 

After  leaving  ]Mill,  we  come  to  a  vast  swarm  of  writers,  all 
of  whom  repeat  hira  with  a  greater  or  less  degree  of  extrava- 
gance, with  the  exception,  perhaps,  of  Mr.  H.  D.  Macleod, 
who  has  erected  a  vast  system,  measui-ed  by  the  number  of 
pages  devoted  to  it,  the  fundamental  principle  of  which  is  that 
gold  and  silver  serve  as  money  by  reason  of  being  representa- 
tive of  debt ;  that  paper  serves  as  such  by  reason  of  being 
the  representative  of  transferable  debt ;  and  that  whatever 
represents  transferable  debt  is  currency,  —  paper  money.  The 
italics  and  capitals  are  his  own. 

"  In  this  sentence,"  says  Macleod  (referring  to  Law's  commen- 
tary upon  Chamberlain's  plan  for  a  bank  based  upon  real  estate), 
"  is  concentrated  the  whole  essence  of  that  eternal  delusion,  so 
specious  and  plausible,  and  so  fatal,  which  we  designate  as  LAW- 
ISM.  It  is,  indeed,  nothing  but  the  stupendous  fallacy  that  money 
represents  commodities,  and  that  paper  currency  may  be  based  upon 
commodities.  This  delusion  is  deeply  prevalent  in  the  public  mind 
at  the  present  day,  and  probably  there  are  few  persons,  except 
those  who  have  studied  the  true  philosophical  principles  of  Politi- 
cal Economy,  whose  views  are  not  deeply  tainted  with  this  infec- 
tion.     No  man  who  does  not  thoroughly   understand   the   great 

1  Charles  V.  being,  iu  1550,  in  Biervliet,  where  Beukels  was  buried,  visited 
Ills  grave,  and  ordered  a  magnificent  monument  to  be  erected  to  the  memory  of 
one  to  whom  his  country  owed  so  much.  What  would  have  been  his  emotions 
could  the  veil  of  the  future  have  been  lifted  so  as  to  disclose  tlie  real  signifi- 
cance and  effect  of  Beukels'  discovery  iu  the  disaster  and  ruin  brought  upon 
his  house  .' 


364  HISTOEY   OF    MONETARY  THEOEIES. 

fundamental  doctrine  established  by  Turgot  and  others,  that  money 
does  not  represent  commodities,  can  ever  have  sound  ideas  on  this 
subject.  Money  does  not  eepresext  commodities  at  all, 
BUT    ONLY    DEBT  ;    or    services    due,  which    have    not  yet 

RECEIVED    their    EQUIVALENT    IN    COMMODITIES.        XoW,    the    vieWS 

of  Law  are  much  more  extensively  prevalent  than  is  generally 
supposed.  All  who  think  that  there  is  any  necessary  connection 
between  the  quantity  of  money  in  a  country  and  the  quantity  of 
commodities  in  it  are  influenced  by  them.  Take  the  case  of  a 
private  individual.  Is  there  any  necessary  relation  between  the 
quantity  of  money  he  retains  and  the  quantity  of  commodities  he 
purchases  ?  The  quantity  of  money  lie  has  is  just  the  quantity  of 
debt  of  services  due  to  him,  —  which  he  has  not  yet  parted  with  for 
something  else.  It  is  the  quantity  of  power  for  purchasing  com- 
modities he  has  over  and  above  what  he  has  already  expended. 
And  the  quantity  of  money  a  nation  possesses  is  simply  the  quan- 
tity of  accumulated  industry  it  possessses  over  and  above  all  com- 
modities ;  but  they  have  no  relation  to  each  other.  Now,  money 
does  not  represent  commodities ;  but  it  represents  that  portion  of 
a  man's  industry  which  is  reserved  for  future  use.  Whatever  a 
man  earns  is  the  fruit  of  his  industry,  money  included  ;  and  none 
of  the  separate  items  represent  any  thing  else,  though  it  may  be 
exchanged  for  other  things.  Now,  the  value  of  money  depends 
upon  its  relations  to  what  it  represents,  namely,  debt,  and  not  to 
commodities.  If  money  or  currency  increases  faster  than  debt  or 
services  due,  it  immediately  causes  a  diminution  of  its  value.  If 
debt  increases  faster  than  money^  or  currency,  then  the  value 
of  money  is  raised.  The  infallible  consequence,  therefore,  of  an 
increase  of  currency,  without  a  corresponding  increase  of  debt, 
is  to  change  the  existing  proportion  between  debt  and  currency, 
and  to  cause  a  depreciation  of  the  latter  commensurate  to  the 
changed  proportion.  The  necessary  and  inevitable  consequence, 
then,"of  issuing  vast  quantities  of  paper  currency  on  the  assumed 
value  of  property,  is  sim])ly  to  cause  a  total  subversion  of  the 
foundation  of  all  value  and  of  all  property,  and  to  plunge  every 
creditor  into  irretrievable  ruin.  .  .  . 

"  We  must,  therefore,  be  careful  to  be  just  to  Law.  He  was  no 
advocate  of  an  unlimited  inconvertible  paper  currency.  Quite  the 
reverse.  But,  seeing  that  a  convertible  paper  currency  could  only 
be  based  upon  bullion  to  a  certain  limited  extent,  preserving  its 
equality  in  value  with  bullion,  his  idea  was  to  base  a  paper  currency 
upon  some  other  article  of  value ;  and  he  thought  that  it  might  pre- 
serve its  equality  in  value  to  silver  on  an  independent  basis.  His 
idea  was,  that  it  was  only  necessary  to  have  it  represent  some 
article  of  value.  But  this  attempt  was  contrary  to  the  nature  of 
things.  His  paper  currency,  though  avowedly  based  upon  things 
of  value,  had  exactly  the  same  practical  effects  as  if  it  had  been 
based  upon  silver.  It  became  redundant,  and  swamped  every 
thing.  And  the  reason  is  plain  :  it  was  a  violation  of  the  funda- 
mental principle  we  have  obtained  —  '  Where  there  is  no  debt,  there 
can  be  no  currency.^     And  the  fresh  quantities  of  currency  issued 


H.   D.   MACLEOD.  365 

on  such  a  principle  only  represent  the  previously  existing  amount 
of  debt,  and  then  suffer  a  necessary  diminution  in  value. ^    ,  .  . 

"The  forecroing  considerations  also  show  the  complete  fallacy  of 
the  theory  we  have  been  discussing,  —  of  issuing  notes  upon  '  good 
bills.'  In  a  banker's  sense,  a  '  good  bill '  means  simply  a  bill 
which  is  duly  paid  by  the  proper  party  at  maturity.  It  is  not  of  the 
smallest  consequence  to  him  whether  the  transaction  out  of  which 
the  bill  originated  is  a  profit  or  a  loss  to  the  person  who  incurred 
the  obligation,  as  long  as  he  is  paid.  But  if  the  expression  '  good 
bill '  be  taken  in  a"  more  extended  and  philosophical  sense  to 
denote  a  bill  upon  which  it  is  safe  to  issue  currency,  it  is  a  very 
different  matter  indeed;  for  then  a  'good  bill '  can  only  mean  one 
generated  by  a  successful  operation. 

"  It  is  not  a  little  remarkable  that  Adam  Smith  adopts  both  the 
theories  of  paper  currency  which  have  imposed  so  extensively  on 
the  banking  and  mercantile  world,  and  that  within  a  very  few 
pages  of  each  other :  the  one  theory,  that  which  the  Bank  Direc- 
tors and  merchants  adopted  in  1810 ;  the  other,  which  is  the  great 
currency  fallacy  of  the  present  day.  The  two  theories  are  utterly 
irreconcilable  and  inconsistent  with  each  other:  the  one  necessarily 
leads  to  the  most  excessive  overissues  and  depreciation  of  the 
paper  currency  ;  the  other,  if  carried  out  in  all  its  integrity,  would 
be  utterly  destructive  to  the  business  of  banking. 

"  What,  then,  is  the  only  true  foundation  of  a  paper  currency  ? 
Every  consideration  of  sound  reasoning  and  science  proves  that 
the  only  true  foundation  of  a  paper  currency  is  that  substance 
which  is  the  legal  or  the  universally  accepted  representative  of 
DEBT,  t.e.,  of  services  due,  whatever  that  substance  may  be. 
Now,  among  all  civilized  nations,  gold  or  silver  bullion  is  the  ac- 
knowledged representative  of  debt.  Consequently,  gold  or  silver 
bullion  is  the  only  true  basis  of  a  paper  currency.  Among  all 
civilized  nations,  the  toeight  of  bidlion  is  the  acknoioledged  measure 
of  value  ;  and,  consequently,  bullion  is  the  only  true  basis  of  the 
'promises  to  pay.'  Many  unthinking  persons  declaim  against  the 
absurdity  of  founding  a  paper  currency  upon  the  commodity  of  gold 
bullion,  rather  than  any  other  commodity,  such  as  wheat,  or  silk,  or 
sugar.  But  it  is  not  as  a  commodity  that  bullion  is  the  basis  of  a 
paper  currency,  but  as  the  substance  which  is  the  accepted  repre- 
sentative of  debt.  It  would  be  perfectly  possible  to  make  a  yard  of 
broadcloth,  or  a  Dutch  cheese,  representative  of  debt  and  the 
measure  of  value.  Then  broadcloth  or  Dutch  cheeses  would  be 
the  only  true  basis  of  a  paper  currency ;  and  to  issue  paper  upon 
the  basis  of  bullion  would,  in  such  a  case,  be  as  improper  as  to  issue 
paper  upon  the  basis  of  broadcloth  or  Dutch  cheeses,  under  existing 
circumstances.  But  all  nations  are  agreed  that  bullion  is  better  fitted 
by  nature  for  such  purpose  than  broadcloth  or  Dutch  cheeses  ;  and, 
consequently,  as  it  seems  to  be  the  substance  pointed  out  by  Xature 
herself  for  representing  debt,  it  is  the  substance  which  forms  the 
only  true  basis  of  a  paj^er  currency. 

1  Macleod  on  Banking,  vol.  ii.  pp.  172-174. 


366  HISTORY  O^  MONETARY  THEORIES. 

"  Bullion,  then,  as  the  symbol  of  debt,  is  not  only  the  sole  proper 
basis  of  a  paper  currency,  but  is  the  only  true  regulator  of  its 
amount.  As  all  paper  currency  is  a  'promise  to  pay'  gold  or 
silver  bullion  at  some  definite  time,  it  is  quite  evident  that  the 
'  promises  to  pay  '  floating  in  a  nation  must  bear  some  proportion 
in  quantity  to  the  actual  quantity  of  the  bullion.  It  is  quite  im- 
possible to  fix  any  definite  proportion  ;  because  that  depends  upon 
a  multitude  of  peculiar  circumstances.  Experience  is  the  only 
guide  on  the  subject.  Specie  and  ci'edit,  or  money  and  promises 
to  pav  money,  then,  form  the  only  true  circulating  medium  or 
currency  ;  and  they  are  its  limits.-^  .  .  . 

"  But,  while  we  contend  that  Lord  Overstone's  criterion  of  a 
currency  is  fatal  to  his  own  view,  we  are  quite  willing  to  accept  it. 
For  what  is  it  that  exists  in  all  places,  in  all  times,  and  among 
almost  all  persons?  DEBT,  or  SERVICES  DUE.  And  what 
is  it  that  is  iiniversally  required  to  measure,  record,  and  transfer 
them?  Some  material.  But  we  see  that  all  currencies  are  more 
or  less  local :  none  are  universal.  The  idea,  or  the  want  alone,  is 
universal.  The  notes  of  a  country  banker,  only  circulating  in  his 
own  neighborhood,  are  like  a  country  ^j>aioi5  .*  each  district  has  its 
own.  A  national  currency  rises  to  the  dignity  of  a  language. 
But  even  that  is  only  local,  on  a  larger  scale.  The  ideas  only  ex- 
pressed in  the  language  are  universal.  We  are,  therefore,  strength- 
ened in  our  conviction,  that  the  only  true  idea  of  a  currency  is  that 
it  is  the  Represe/ntative  of  Transferable  Debt,  and  that  whatever 
represents  Transferable  Debt  is  Currency T  ^ 

It  will  be  time  enough  to  reply  to  such  flippant  and  in- 
coherent nonsense,  swollen  into  two  spacious  volumes,  when. 
Dr.  Schliemann  shall  have  dug  up  at  Troas  or  My  cense  Dutch 
cheeses  perfectly  fresh  and  sweet,  and  bearing  vipon  their  sur- 
faces the  dimples  in  the  exact  form  and  shape  in  which  they 
were  impressed  by  the  tiny  fingers  of  the  pretty  Dutch  milk- 
maids three  thousand  years  ago.  Till  then  the  habit  or  prej- 
iidice  of  mankind  in  assuming  gold,  as  money,  to  be  capital 
instead  of  debt,  will  be  considered  as  resulting  not  from 
accident,  but  from  law. 

*'  We  must  now  consider,"  he  says,  "  the  eflTect  of  an  incon- 
vertible paper  currency  on  the  foreign  exchanges  and  the  market 
price  of  bullion.  So  long  as  paper  is  convertible,  that  is,  the 
holder  of  it  has  the  power  to  demand  payment  in  gold  for  it  at 
sight,  it  is  very  clear  that  it  cannot  circulate  at  a  discount ;  because, 
if  "it  fell  to  a  discount,  every  person  who  held  it  would  immediately 
go  and  demand  gold  for  it.     But  if,  while  it  enjoys  considerable 

1  Macleod  on  Banking,  vol.  ii.  pp.  191,  192. 

2  Macleod  on  Banking,  vol.  i.  p.  209. 


H.   D.   MACLEOD.  367 

circulation,  the  power  of  convertibility  is  suddenly  taken  away, 
then  it  becomes,  in  all  respects,  equivalent  to  a  new  standard,  just 
as  much  as  gold  or  silver  ;  and  its  value  will  be  affected  by  the 
same  principles  as  these  two,  viz.,  by  the  sole  question  of  the  quan- 
tity of  it  in  circulation  compared  to  the  operations  it  rejjresents. 

"  Now  if,  for  the  public  convenience,  it  be  deemed  advisable  to 
issue  an  inconvertible  paper  currency,  the  only  way  of  maintaining 
its  currency  at  par  is  by  limiting  its  quantity.  We  do  not  mean 
by  this,  limiting  its  quantity  to  an  absolute  fixed  amount ;  but  by 
devising  some  means  whereby  a  greater  quantity  of  it  shall  not  he 
issued  than  if  it  were  convertible  into  gold.  If  more  than  this  be 
issued,  it  will  be  followed  by  the  same  result  as  attends  an  ex- 
cessive issue  of  silver  :  it  will  fall  to  a  discount,  which  in  this  case 
is  depreciation  ;  and  the  necessary  consequences  of  a  depreciated 
currency  will  follow,  viz.,  the  market  price  (or  paper  price)  of 
bullion  will  rise  above  the  mint  price,  and  the  foreign  exchanges 
will  fall. 

"  Now,  if  such  a  state  of  things  hap]iens,the  proper  remedy  is  to 
diminish  the  quantity  of  the  paper  in  circulation  until  the  market 
price  of  bullion  is  reduced  to  the  level  of  the  mint  price.  If  the 
direct  power  of  demanding  five  sovereigns  be  taken  away  from 
the  holder  of  a  £5  note,  still,  if  he  can  purchase  bullion  with  it  in 
the  market  to  the  amount  of  five  sovereigns,  it  is  an  infallible 
proof  that  the  note  is  current  at  par ;  and  the  limitation  need  not 
proceed  beyond  that. 

"  Whenever  the  currency  of  a  country  becomes  redundant,  that 
is  to  say,  that  prices  rise  so  much  higher  in  one  country  than  in  its 
neighbors  that  the  value  of  money  sensibly  diminishes,  the  natural 
corrective  for  such  a  thing  is  to  take  a  certain  portion  of  it  out  of 
circulation  ;  so  that,  by  diminishing  the  quantity  of  it,  its  value 
may  be  raised.  When  people  find  that  the  same  quantity  of  gold 
will  not  purchase  an  equal  amount  of  commodities  in  this  coun- 
try as  they  will  in  another,  their  own  natural  instincts  will  lead 
them  to  purchase  commodities  abroad,  where  they  are  cheap,  and 
bring  them  for  sale  here  where  they  are  dear.  The  natural  instincts 
of  trade  Aviil,  therefore,  produce  an  equilibrium  in  value  in  the 
currency  of  neighboring  countries. 

"  Now,  when  the  currency  of  a  country  consists  partly  of 
paper  and  partly  of  gold  and  silver,  it  is  quite  clear  that  only 
the  metallic  portion  of  it  can  be  exported  in  payment  of  foreign 
commodities.  The  paper  portion  of  it  which  has  no  value  abroad 
must  remain  at  home.  If  the  issues  of  the  paper  be  continued  so 
as  to  prevent  the  currency  from  recovering  its  value,  the  process 
of  the  exportation  of  the  metallic  portion  will  go  on  until  it  is 
entirely  exhausted.  If  this  be  the  case,  the  only  method  of  restoring 
the  currency  to  its  former  value  is  by  diminishing  the  quantity  of 
the  paper  until  the  drain  is  stopped  by  the  enhancement  of  the 
value  of  the  whole  quantity."  ^ 

1  Macleod  on  Banking,  vol.  i.  pp.  257-260. 


368  HISTORY  or  monetahy  theoeies. 

This  is  onl}-  the  old  story  over  again,  that  value  is  not  neces- 
sary to  the  circulation  of  a  government  or  inconvertible  cur- 
rency ;  that,  no  matter  how  worthless  it  may  be,  it  will  circulate 
at  the  value  of  coin,  if  it  do  not  exceed  the  amount  of  convert- 
ible paper  which  would  have  circulated  in  its  place,  or  if  its 
quantity  do  not  exceed  the  wants  of  the  community  in  its 
exchanges.  It  is  useless  to  repeat  the  demonstration  that  all 
currencies  circulate  at  their  real  or  assumed  values. 

The  late  Mr.  James  W.  Gilbart  was  a  striking  instance  of  a 
voluminous  writer  upon  money,  without  any  proper  compre- 
hension of  its  nature  and  laws.  He  was  the  author  of  an 
elaborate  work  upon  "  The  Principles  and  Practice  of  Bank- 
ing," and  of  half  a  dozen  others  upon  that  and  kindred  sub- 
jects. He  was,  for  a  long  time,  manager  of  the  London  and 
Westminster  Bank,  which  he  conducted  with  no  little  ability 
and  success.  As  a  Political  Economist,  he  belonged  to  the 
school  of  Tooke  and  Mill,  in  holding  that  the  convertible 
notes  of  no  other  Bank  than  that  of  the  Bank  of  England 
could  influence  prices  or  the  rates  of  exchange.  His  reasons 
are  sufficiently  set  forth  by  the  following  extracts  from  the 
evidence  given  by  him  before  the  House  Committee  of  1840-41 
upon  "  Banks  of  issue." 

"  What  reference  is  made  in  the  issue  of  paper  to  the  quantity 
of  gold  in  the  country,  and  to  the  ultimate  abiUty  of  the  parties  to 
discharge  their  paper  engagements  in  gold?  —  The  bankers  in 
issuing  their  notes  do  not  make  any  reference  to  the  quantity  of 
gold  in  the  country ;  but  they  make  reference  to  their  ability  to 
discharge  these  notes  when  returned  to  them  for  payment. 

"What  is  the  nature  of  the  reference  which  they  make?  —  By 
keeping  securities  available  for  the  purpose  of  being  sold,  in  order 
to  discharge  those  notes  whenever  presented  to  them  for  payment. 

"  Suppose  there  was  one  Bank  which  had  the  charge  of  the 
paper  circulation  of  the  country,  and  had  the  means,  therefore,  by 
constant  reference  to  the  state  of  the  exchanges,  of  determining  the 
amount  of  the  paper  circulation,  do  not  you  think  that  there  would 
be  a  greater  security  against  a  sudden  demand  for  gold,  and  an  in- 
ability to  pay  that  gold,  than  there  is  when  there  are  a  great  many 
issuers,  none  of  whom,  according  to  your  own  statement,  pay  the 
slightest  regard  to  the  state  of  the  exchanges?  —  No  ;  I  think  not. 

"  What,  then,  supplies  the  check?  —  The  check  upon  the  private 
bankers  is,  that  their  circulation  cannot  be  issued  to  excess  ;  Avhere- 
as,  if  you  had  a  Bank  which  should  issue  notes  for  so  much  gold, 
then  every  time  there  was  a  favorable  course  of  exchange  there 
would  be  a  large  issue  of  notes,  which  notes  would  necessarily 


JAMES   W.   GILBAET.  369 

reduce  the  rate  of  interest,  lead  to  speculation,  and  turn  the  ex- 
changes again  by  causing  investments  to  be  made  in  foreign  coun- 
tries. Now,  as  issues  are  at  present  conducted,  bankers  are  under 
several  checks  which  would  not  apply  to  such  a  Bank,  —  for  in- 
stance, the  check  of  the  interchange  with  each  other  of  their 
different  notes  once  or  twice  a  week,  and  the  check  of  having  their 
notes  payable  on  demand  ;  Avhereas,  the  notes  of  such  a  Bank  as 
you  suppose  would  not  be  diminished  except  when  gold  was 
wanted  to  be  sent  abroad.  Another  check  is  the  practice  of  giving 
interest  upon  deposits,  by  which  all  the  surplus  circulation  is 
called  in  and  lodged  with  the  Banks.  Now,  such  a  Bank  as  you 
have  supposed  would  not  be  under  the  control  of  those  checks, 
and  it  would  be  under  the  necessity  of  increasing  the  circulation 
whenever  the  exchange  became  favorable;  and  we  know  by  ex- 
perience that  the  most  sure  way  of  making  the  exchanges  unfavor- 
able is  a  previous  excessive  issue  ;  that  previous  excessive  issue 
•would  necessarily  arise,  on  the  principle  you  have  supposed,  every 
time  the  exchange  was  favorable. 

"You  think  that  there  is  some  cause  in  operation  which  applies 
equally  to  all  issuers  of  paper,  and  prevents  any  undue  issue  of 
paper,  and  dispenses  with  the  necessity  of  any  reference  on  the 
part  of  each  issuer  to  the  state  of  the  exchanges  ?  —  That  is  the 
case  with  all  country  issuers  of  paper.  With  regard  to  the  Bank 
of  England,  who  have  the  power  of  issuing  their  notes  in  exchange 
against  bullion,  in  the  purchase  of  Exchequer  bills  and  govern- 
ment stock,  it  is  quite  clear  that  notes  put  into  operation  in  that 
•way,  being  thrown  in  a  mass  upon  the  previously  existing  state  of 
trade,  will  have  the  effect  of  raising  prices  and  reducing  interest, 
and  turn  the  exchanges  ;  but  if  notes  are  issued  merely  to  pay 
for  transactions  that  have  previously  taken  place,  and  are  drawn 
out  by  the  operations  of  trade,  those  notes  will  have  no  such 
effect.  .  .  . 

"  Then,  you  do  think  that  the  expansion  of  the  circulation  of  the 
Bank  of  England  may  cause  unfavorable  exchanges  ?  —  Yes. 

"  Why  should  not  the  expansion  of  the  circulation  on  the  part 
of  the  country  issuers  produce  the  same  effect? — Because  the 
country  circulation  is  under  checks,  whereas  the  Bank  of  England 
circulation  is  not :  the  country  circulation  can  be  issued  only  in 
consequence  of  ti'ansactions  which  have  taken  place,  and  to  the 
extent  only  required  by  the  wants  of  the  district ;  whereas  it  is 
obvious  that  the  Bank  of  England  has  the  power  of  increasing  the 
circulation  by  the  purchase  of  Exchequer  bills  or  stock,  or  by 
purchasing  bullion,  and  throwing  a  mass  of  notes  on  the  market 
when  the  state  of  ti*ade  does  not  require  it. 

"  Chairman.  Have  you  any  further  observations  to  make  to  the 
Committee? — When  the  first  question  was  asked  of  me,  at  the 
commencement  of  my  examination,  I  stated  that  I  appeared  before 
the  Committee  as  the  representative  of  the  joint-stock  Banks,  and 
that,  therefore,  in  expressing  any  opinions  consistently  Avith  the 
resolutions  which  they  had  passed,  I  wished  to  be  considered  as 
speaking  the  sentiments  of  the  joint-stock  Banks;  but,  sliould  the 

24 


370  HISTORY  OF  MONETARY   THEORIES. 

Committee  ask  me  any  question  not  connected  with  the  circum- 
stances of  country  issues,  that  I  wish  to  be  considered  as  speaking 
my  own  individual  opinions.  The  points  upon  which  I  wish  to  be 
considered  as  speaking  the  sentiments  of  the  joint-stock  Banks  are 
as  follows  :  I  speak  the  opinions  of  the  joint-stock  Banks  in  say- 
ing that  their  circulation  cannot  be  made  to  fluctuate  in  exact 
conformity  with  the  circulation  of  the  Bank  of  England,  or  with 
the  stock  of  gold  in  the  Bank  of  England  ;  that  the  country  issue 
is  drawn  out  by  the  demands  of  trade,  and  is  subject  to  checks  to 
which  the  circulation  of  the  Bank  of  England  is  not  lialjle  ;  that 
the  country  bankers  have  not  the  power  of  issuing  their  notes  to 
excess  ;  that  they  cannot  contract  their  circulation,  or  expand  it,  as 
they  please  ;  and,  also,  that  the  country  circulation  does  not  influ- 
ence the  prices  of  commodities,  and  that  it  cannot  be  regulated  by 
the  principles  of  the  foreign  exchanges."  ^ 

The  issues  of  private  Banks  and  bankers,  says  Mr.  Gilbart, 
can  never  be  in  excess,  for  two  reasons :  1st,  from  their  con- 
stant retirement  "by  the  interchange  by  the  Banks  with 
each  other  of  their  different  notes  and  checks,  once  or  twice  a 
week  ;  "  and,  2d,  for  the  reason  that,  by  allowing  interest  on  de- 
posits, "  all  the  surplus  circulation  is  called  in,  and  lodged  with 
the  Banks."  Suppose  all  the  Banks  to  largely  increase  their 
issues,  the  exchange  of  .£10,000,000  per  week  would  be  no 
more  of  a  check  than  the  exchange  of  £5,000,000.  One 
quantity  could  be  exchanged  as  well  as  another.  An  inflation 
may  take  place  to  a  very  large  extent  where  exchanges  are 
daily  made,  and  where  the  Banks  are  on  a  specie  basis,  pro- 
vided the  issuers  are  all  actuated  by  similar  sentiments  and 
move  in  a  similar  direction.  This  is  the  way  inflations  do  take 
place,  and  continue  till  some  link  in  the  chain  snaps,  to  dis- 
close the  weakness  of  all.  Suppose  all  excess  of  currency  to 
be  called  in  by  reason  of  an  allowance  of  interest  by  the  Banks, 
how  is  such  interest  to  be  paid  ?  Of  course,  by  reloaning  the 
"  excess  "  so  deposited,  as  fast  as  received.  The  "  excess  " 
would  be  in  circulation  as  much  after  as  before  it  was  taken 
in,  only  in  a  different  form.  Both  of  his  checks,  therefore,  are 
only  creations  of  his  own  imagination. 

The  issues  of  country  Banks,  says  Mr.  Gilbart,  cannot  affect 
prices  like  those  of  the  Bank  of  England,  for  the  reason  that 
they  are  issued  merely  to  pay  for  transactions  that  have  pre- 

1  Principles  and  Practice  of  Banking,  pp.  477-481. 


JAMES   W.   GILBART.  371 

viously  taken  place,  or  are  drawn  out  by  the  operations  of 
trade  ;  while,  "  with  regard  to  the  Bank  of  England,  which 
has  the  power  of  issuing  its  notes  in  exchange  against  bullion, 
in  the  purchase  of  Exchequer  bills  and  government  stock,  it 
is  quite  clear  that  notes  put  into  operation  in  that  way,  being 
thrown  in  a  mass  upon  the  previously  existing  state  of  trade, 
will  have  the  effect  of  raising  prices  and  reducing  interest,  and 
turn  the  exchanges,"  —  an  effect  which  the  issues  of  country 
Banks  ^vill  not  produce.  Now  a  .£1,000  bank-note  of  a  country 
Bank,  or  a  check  for  a  like  amount  drawn  against  deposits  in 
it,  will  exert  precisely  the  same  effect  upon  prices,  and  upon 
the  rates  of  interest  and  exchange,  as  a  £1,000  note  or  check 
upon  the  Bank  of  England.  The  one  is  thrown  in  mass 
upon  the  previously  existing  state  of  trade  as  much  as  the 
other.  The  Bank  throws  its  notes  into  the  market  for  the 
purchase  of  Exchequer  bills  and  securities  ;  the  country  Bank, 
in  the  purchase  of  similar  securities,  or  to  help  forward  some 
enterprise  or  speculative  scheme.  The  impulse  or  motive 
that  gave  birth  to  each  is  precisely  the  same.  Once  in  the 
market,  they  perform  precisely  the  same  functions,  and  are 
subject  to  precisely  the  same  laws.  They  are  equally  promises 
to  pay  coin  on  demand  ;  and  must  be  equally  discharged  within 
similar  periods,  by  the  payment  of  coin  or  its  equivalent. 
Mr.  Gilbart  assumed  that  the  Bank  of  England  notes,  when 
issued  against  bullion  and  used  in  the  purchase  of  securities, 
would  remain  in  circulation  till  the  gold,  by  the  turning  of 
the  rates  of  exchange,  is  wanted  for  export ;  and,  by  remain- 
ing in  circulation,  would  affect  prices  in  a  manner  wliich  the 
notes  of  private  Banks  and  bankers  could  not,  for  the  reason 
that  the  latter  were  called  into  existence  only  by  commercial 
operations  taking  place,  or  which  were  to  take  place,  and  must 
be  speedily  retired.  But  years  may  elapse  after  the  loans  for 
getting  rid  of  the  bullion  in  the  Bank  were  made,  before  the 
exchanges  would  turn  sufficiently  to  cause  an  export  of  gold. 
In  the  mean  time,  the  notes  so  issued  would  have  been  taken 
in  and  reissued,  or  others  issued  in  their  place,  a  dozen  times  ; 
and  in  every  case,  by  the  payment  of  gold  or  its  equivalent. 
When  the  notes  of  the  Bank,  or  of  an}'  private  Bank  or  banker, 
get  into  circulation,  they  produce  an  effect  in  ratio  to  their 
quantity  or  amount ;  and  as  the  issues  of  the  private  Banks 
and  bankers  in  England,  including  joint-stock  Banks,  exceed 


372  HISTORY  OF   MONETARY    THEORIES. 

tenfold  those  of  the  Bank  of  England,  their  effect  must  be  in 
like  ratio,  —  that  is,  ten  times  greater  than  that  exerted  by 
those  of  the  Bank.  It  is  certain  that  the  former  do  exert  a 
much  greater  influence  over  prices  and  the  rates  of  exchange, 
in  ratio  to  their  amount,  than  the  latter ;  for  the  reason  that  they 
have  a  much  more  intimate  connection  than  those  of  the  Bank 
with  the  foreign  commerce  of  the  country,  and  are  usually 
made  upon  securities,  as  a  class,  inferior  to  those  which  the 
rules  of  the  Bank  allow  it  to  take.  Mr.  Gilbart's  assumption, 
therefore,  that  the  notes  of  the  Bank  exert  an  influence  over 
prices  and  rates  of  exchange  greater  than  those  exerted  by  the 
notes  of  country  Banks,  is  as  wanting  in  meaning  as  was  Lord 
Overstone's  distinction  between  the  effect  produced  by  the 
notes  of  the  Bank  and  checks  drawn  upon  it. 

To  questions  put  to  him  by  the  Committee  of  1840-41  as  to 
what  course  he  would  advise  the  Bank  to  pursue  in  the  event 
of  a  war,  he  replied  as  follows  :  — 

Question  1064.  "Your  answer  assumes  that  the  exchanges  are 
never  likely  to  be  adverse  during  the  period  of  a  war,  or  that  the 
drain  of  gold  is  not  likely  to  be  considerable  ;  how  do  you  reconcile 
that  with  the  circumstances  attending  the  last  war,  or  with  the 
war  in  1797,  when  the  Bank  was  reduced  to  a  state  of  exhaustion 
of  its  treasure  ?  "  —  "  I  do  not  know  that  any  answer  assumes  that ; 
but,  however,  as  a  poUtical  question,  rather  than  a  banking  one,  I 
confess  that,  if  I  were  the  Prime  Minister,  I  would  immediately,  on 
the  commencement  of  a  war,  issue  an  order  in  council  for  the 
Bank  to  stop  payment." 

Question  1065.  "  Then,  you  are  of  opinion  that  a  suspension  of 
payment  is  necessarily  the  consequence  of  a  war  ?  "  —  " '  Necessarily  * 
is  a  strong  term ;  but  I  should  think  it  the  best  measure  to  adopt, 
and  I  should  decidedly  adopt  it." 

Question  1144,  Sir  Thomas  Fremantle.  "  Do  you  mean  to  say 
that  the  Bank  would  be  able  to  do  so  in  a  time  of  war  ?  "  —  "  In  a 
time  of  war  I  should  stop  payment  at  once.  It  would  be  better  to 
stop  before  the  gold  was  gone  than  afterwards." 

Question  1145,  Mr.  Warburtoyi.  "You  would  recommend  that  as 
a  desirable  thing  in  itself  ?  "  —  "  Yes,  as  an  expedient  thing." 

Question  1148,  Sir  Robert  Peel.  "You  would  advise,  under  cer- 
tain circumstances,  a  Bank-restriction  as  a  immediate  measure  ? " 
— "  If  you  had  a  war,  a  Bank-restriction  I  should  immediately 
recommend." 

Question  1149.  .  .  .  "When  you  issued  your  measure  of  restric- 
tion, what  is  the  corresponding  security  that  you  would  take  to 
prevent  that  excess  of  issue  which  you  have  admitted  to  be  an 
evil  ?  "  —  "  In  advocating  immediate  restriction,  1  am  not  speaking 
as  a  banker,  but  a  politician.   I  should  certainly  enact  the  restriction 


JAMES   W.   GILBART.  373 

of  cash  notes,  to  prevent  the  enemy  withdrawing  the  gold  from 
this  country." 

Mr.  Gilbart,  in  the  event  of  a  war,  would  suspend  specie 
payments,  —  would  demonetize  gold  and  silver,  as  a  means  of 
retaining  them  in  the  country.  He  would  cut  off  the  handle 
of  your  axe,  and  render  it  useless,  so  as  to  prevent  an  enemy 
from  striking  off  your  head.  But  how  was  the  enemy  to  get 
hold  of  the  handle  ?  By  paying  the  price  both  for  that  and 
the  axe.  If  he  paid  the  price,  he  might  thereby  put  in  the 
hands  of  the  owner  that  wherewith  to  defend  himself  far  better 
than  with  the  axe.  In  a  war,  men  do  not  pelt  each  other  with 
paper  bullets  and  guineas,  but  with  what  those  purchase  ;  so 
that  a  nation  cannot,  perhaps,  do  a  better  thing  than  increase 
its  means  of  defence  by  parting  with  its  gold.  The  better 
way  is  to  leave  the  handle  in,  and  let  the  enemy  take  it  at  his 
peril.  But  if  the  gold  of  a  country  at  war  be  demonetized,  the 
enemy  or  some  other  nation  will  be  sure  to  get  it,  not  in  ex- 
change for  powder  and  ball,  but  for  wines  and  silks,  —  for  that 
which,  instead  of  arming  and  furnishing  it  for  the  fight,  would 
inevitably  tend  to  its  emasculation,  to  the  destruction  of  all 
patriotism  and  manhood.  The  effect  of  a  war  is  always  to 
turn  the  exchanges  of  a  country  engaged  in  it  in  its  favor,  for 
the  reason  that  every  one  orders  home  the  proceeds  of  his  ex- 
ports in  coin,  in  order  to  have  in  hand  that  upon  which  he 
can  certainly  rely,  should  the  event  prove  unfavorable,  should 
domestic  order  be  disturbed,  or  the  wonted  industries  of  the 
country  fail.  The  exchanges  were  instantly  turned  in  favor  of 
the  United  States  upon  the  outbreak  of  the  war  of  the  Rebel- 
lion, and  gold  continued  to  flow  into  the  country  in  immense 
volume  until  the  suspension  of  specie  payments.  The  exports 
of  coin  and  bullion  from  the  United  States  in  1860,  the  year  pre- 
ceding the  Rebellion,  equalled  $66,546,289 ;  the  imports, 
$8,550,135.  The  imports  for  18.61,  the  first  year  of  the  war, 
during  which  the  country  remained  on  a  specie  basis,  equalled 
$46,359,601;  the  exports,  $23,800,810.  Specie  payments 
were  suspended  near  the  close  of  1861,  through  the  perverse 
action  of  the  Secretary  of  the  Treasury.  The  first  issue  of 
legal-tender  notes  was  authorized  Feb.  25, 1862.  The  imports 
of  specie  for  that  year  equalled  $16,415,012  ;  the  exports, 
$36,886,956.      The  exports  for  1863  equalled  $100,321,731 ; 


374  HISTORY  OF  MONETARY  THEORIES. 

the  imports,  $13,115,612.  These  facts  show  the  effect  of 
demonetizing  the  currency  of  a  country.  The  exports  for 
1863,  1864,  and  1865,  equalled  8220,932,000;  the  imports, 
$32,504,000.  For  the  years  last  named,  legal-tender  notes| 
were  worth  hardly  fifty  per  cent  of  their  par  value.  The  re- 
taining of  gold  in  the  country  was  a  matter  wholly  within  its 
power.  If  legal-tender  notes  had  not  been  issued,  the  United 
States  would  have  laid  all  the  world  under  tribute.  The  first 
impulse  of  a  people  when  they  find  themselves  about  to 
be  plunged  into  a  war  is  to  forego  every  article  that  does  not 
rank  among  the  necessities  of  life.  Their  silver  and  gold  are 
the  first  things  they  place  beyond  the  reach  of  harm.  Foreign- 
ers cannot  get  them,  unless  they  pay  more  than  they  are 
worth.  This  they  will  not  do,  for  the  reason  that  they  can  get 
them  of  nations  at  peace,  for  their  worth.  The  position  of  the 
United  States,  so  far  as  its  currency  was  concerned,  was  im- 
pregnable, but  for  its  voluntary  demonetization.  Both  Eng- 
land and  the  United  States  are  striking  examples  of  the  effect 
of  Mr.  Gilbart's  method.  Both  lost  their  gold  as  soon  as  it 
could  be  taken  away  from  them  by  lavish  and  wasteful  ex- 
penditure. By  reason  of  an  inconvertible  currency,  England 
probably  doubled  her  national  debt.  It  might  not  have  been 
one-tenth  its  present  amount ;  for  if  her  gold  had  not  been 
demonetized,  she  might  have  escaped  or  avoided  wars  which, 
with  all  the  success  achieved,  brought  unnumbered  woes 
upon  her  people.  The  civil  war  in  the  United  States  would 
have  been  ended  in  half  the  time,  and  at  half  the  cost,  but  for 
demonetizing  their  coin.  But  for  this,  the  nation,  when  it  came 
out  of  the  conflict,  would  have  been  in  position  to  have  at 
once  started  upon  a  new  career  of  prosperity,  the  vast  incubus 
of  slavery  having  been  shaken  off.  Twelve  years  have 
elapsed  since  order  was  restored,  and  it  is  still  confronted 
with  a  problem  far  more  difficult  of  solution  than  that  of  the 
subjection  of  the  Slave  States. 

The  following  extract  will  show  the  modes  by  which, 
according  to  Mr.  Gilbart,  banking  capital  may  be  raised :  — 

"  Now,  it  is  obvious  that  these  two  kinds  of  banking  are  adapted 
to  produce  precisely  the  same  effects.  In  each  case,  a  banking 
capital  is  created,  and  each  capital  is  employed  in  precisely  the 
same  way ;  namely,  in  the  discounting  of  bills.    To  the  parties  who 


HEXRY  FAWCETT.  375 

have  their  bills  discountecl,  it  matters  not  from  what  source  the 
capital  is  raised  :  the  advantage  is  the  same  to  them,  and  the 
effects  upon  trade  and  commerce  will  be  the  same.  Let  us  suppose 
that  in  each  case  the  banking  capital  created  is  £50,000.  Now,  the 
Bank  of  circulation  will  have  increased  the  amount  of  money  in 
the  country  by  £50,000.  The  Bank  of  deposit  will  not  have  in- 
cTcased  at  all  the  amount  of  money  in  the  country  ;  but  it  will  have 
put  into  motion  £50,000  that  would  otherwise  have  been  idle. 
Here,  then,  is  a  proof  that  to  give  increased  rapidity  to  the  circu- 
lation of  money  has  precisely  the  same  effect  as  to  increase  the 
amount.  Here,  too,  is  a  proof  of  the  ignorance  of  banking  on  the 
part  of  tbose  writers  who  consider  that  the  Banks  which  issue 
notes  are  the  sole  cause  of  high  prices,  over-trading,  and  speculation  ; 
whereas,  it  is  obvious  that  if  those  effects  are  to  be  attributed  to 
banking  at  all,  they  may  as  foirly  be  ascribed  to  Banks  of  deposit 
as  to  Banks  of  circulation."^ 


The  difference  in  the  two  cases  is,  that  in  one  the  .£50,000 
of  capital  provided  for  the  Bank  is  capital  in  a  form  proper  to 
be  loaned ;  in  the  other,  no  capital  whatever  is  created  or  pro- 
vided. To  say  that  notes,  without  the  least  provision  for 
their  redemption,  are  the  equivalent  of  deposits,  wliich  may  be 
wholly  in  the  form  of  coin  or  of  notes  representing  coin,  is  to 
say  that  fiction  equals  reality,  and  shadow  substance.  The 
difference  in  effect  in  the  operations  of  the  Bank  would  equal 
the  difference  in  fact.  The  issue  of  the  =£50,000,  without 
any  thing  to  support  it,  would  in  all  probability  involve  all 
parties  to  it  in  embarrassment  and  loss,  while  the  loaning  of  the 
capital  made  up  of  deposits  might  prove  most  advantageous 
to  all  parties  to  the  loan.  The  distinction,  however,  between 
the  effect  of  issues  based  upon  capital,  and  such  as  are  purely 
fictitious,  has  been  too  fully  shown  to  require  comment  here. 
Mr.  Gilbart,  undoubtedly,  possessed  a  capacity  of  intuitively 
measuring  the  person  who  wanted  to  borrow  his  money ;  but 
he  was  wholly  out  of  his  sphere  when  he  undertook  to  write 
upon  its  laws. 

Among  the  more  recent  publications  is  the  "  Manual  of 
Political  Economy,"  by  Mr.  Henry  Fawcett,  Professor  of  this 
science  in  the  University  of  Cambridge,  England.  The  fol- 
lowing is  his  account  of  the  nature  and  function  of  paper 
money :  — 

1  Principles  and  Practice  of  Banking,  p.  88. 


376  HISTORY  OF  MONETAEY  THEORIES. 

"  A  moment's  consideration  will  show  that  a  bank-note,  whether 
issued  by  a  State  establishment  or  by  a  private  firm,  is  simply  a 
convenient  form  for  bringing  into  practical  use  the  credit  which 
may  be  possessed  by  the  Bank.  ...  A  banker,  therefore,  whose 
credit  is  good  can  circulate  a  great  number  of  his  notes  in  his 
own  neighborhood ;  his  notes  being  willingly  accepted  by  those  to 
whom  he  is  known.  ...  It  is  manifestly  to  his  advantage  to  issue 
notes ;  for,  suppose  £60,000  of  these  notes  are  kept  in  circulation,  it 
is  ascertained  by  experience  that  an  amount  of  legal  tender  equiva- 
lent in  value  to  one-third  of  the  notes  issued  will  be  sufficient,  if 
kept  as  a  reserve,  to  meet  all  the  notes  which  are  presented  for 
payment.  A  banker,  therefore,  whose  notes  circulate  to  the  extent 
of  £60,000,  has  £40,000  at  his  free  disposal  to  invest  in  some 
profitable  investment.  .  .  . 

"  It  may  be  asked.  What  would  be  the  effect  upon  prices  if  the 
bank-note  circulation  were  suddenly  increased  ?  This  suggests  one 
of  the  most  disputed  of  the  currency  questions.  As  previously 
stated,  the  bank-note  circulation  of  England  is  placed  under 
various  restrictions,  the  nature  of  which  will  be  presently  detailed. 
The  purpose  we  have  in  view,  at  this  stage  of  our  inquiry,  is  to 
investigate  the  effect  which  would  be  produced  on  prices  if  the 
bank-note  circulation  were  largely  increased  by  a  removal  of  all 
restrictions  which  now  limit  its  amount.  We  conceive  thstt  the 
effect  which  would  be  produced  entirely  depends  upoii  circum- 
stances. Let  it  be  supposed  that  there  is  no  change  in  the  popula- 
tion, or  in  the  commercial  condition  of  the  country.  If,  under 
these  circumstances,  an  increased  issue  of  notes  were  added  to 
the  money  circulation  of  the  country,  prices  would  manifestly  rise ; 
because  there  would  be  now  more  money  in  circulation  to  carry  on 
the  same  amount  of  buying  and  selling  which  was  previously  con- 
ducted by  a  smaller  amount  of  money.  If,  however,  the  additional 
notes  which  are  issued  simply  cause  a  corresponding  amount  of 
bullion  to  be  withdrawn  from  circulation,  it  is  manifest  that  no 
effect  is  produced  on  prices.  The  only  result  is,  that  the  trade  of 
the  country  is  carried  on  more  economically ;  because  these  notes, 
which  are  simply  pieces  of  paper  of  no  intrinsic  value,  perform 
with  equal  efficiency  all  the  purposes  which  were  previously  ful- 
filled by  the  gold,  now  supposed  to  be  dispensed  with.  Conse- 
quently the  economy  of  this  substitution  is  evident.  Gold  is  a 
valuable  commodity,  requiring  much  labor  and  capital  to  obtain  it. 
We  therefore  have  the  following  principles  to  guide  us  in  an 
inquiry  into  the  effects  of  a  bank-note  circulation  :  — 

"1.  If  bank-notes  simply  occupy,  in  the  monetary  circulation  of 
the  country,  the  place  of  a  corresponding  value  of  bullion,  these 
notes  produce  no  effect  on  prices. 

"  2.  If  it  can  be  shown,  that,  either  by  the  repeal  of  the  Bank 
Charter  Act  or  by  any  other  cause,  the  bank-note  circulation  of 
the  country  can  be  increased  without  withdrawing  from  circulation 
a  corresponding  amount  of  coin,  it  is  manifest  that  the  aggregate 
money  circulating  in  a  country  will  be  augmented,  and  general 
prices  will,  as  a  consequence,  undoubtedly  rise.  .  .  . 


HENRY  FAWCETT.  377 

"  In  discussing  the  laws  of  price,  the  principle  was  established, 
that  general  prices  depend  upon  the  quantity  of  money  in  circula- 
tion compared  with  the  wealth  which  is  bought  and  sold  with 
money,  and  also  upon  the  frequency  with  which  this  wealth  is 
bought  and  sold  before  it  is  consumed"!  If  more  wealth  is  produced, 
and  an  increased  quantity  of  w^ealth  is  also  bought  and  sold  for 
money,  general  prices  must  decline,  unless  a  large  quantity  of  money 
is  brought  into  circulation.  Suppose,  for  instance,  that  the  produc- 
tion of  every  kind  of  weahh  is  doubled  in  this  country,  that  every 
one  doubles  his  purchase  of  commodities,  and,  at  the  same  time, 
there  is  no  increase  in  the  amount  of  money  in  circulation  :  upon 
this  hypothesis,  each  individual,  although  he  is  supposed  to  pur- 
chase twice  as  much  of  every  commodity  as  he  did  before,  will 
only  possess  the  same  amount  of  money  with  which  to  effect  these 
purchases.  He  will,  therefore,  be  only  able  to  give  the  same 
amount  of  money  for  double  the  quantity  of  each  commodity  he 
purchases  ;  but  this  is  tantamount  to  saying  that  general  prices  have 
declined  one  half.  In  fact,  if  there  should  be  an  increased  produc- 
tion of  wealth,  if  there  should  be  more  buying  and  selling,  or  if 
any  other  circumstance  should  occur  the  effect  of  which  is  to 
require  the  circulation  of  a  larger  amount  of  money,  the  value  of 
money  must  rise  ;  or,  in  other  w^ords,  general  prices  must  decline, 
unless  an  increased  supply  of  money  is  forthcoming,  so  that  a 
larger  amount  may  be  brought  into  circulation.  When  buying 
and  selling  are  effected  by  bills  of  exchange,  the  necessity  for 
money  is  as  completely  dispensed  with  as  if  the  transaction  was 
carried  on  by  barter:  these  trading  transactions,  therefore,  in 
which  bills  of  exchange  are  employed  may  be  almost  indefinitely 
extended,  without  rendering  it  necessary  to  bring  an  increased 
amount  of  money  into  circulation. 

"  A  consideration  of  some  of  the  consequences  which  would  en- 
sue if  bills  of  exchange  did  not  exist  will  perhaps  more  plainly 
indicate  the  influence  which  they  exert  upon  prices.  Suppose  that 
all  the  commodities  which  are  now  bought  and  sold  by  means  of 
bills  of  exchange  were  paid  for  by  money,  a  largely  increased 
amount  of  money  would  be  required  to  be  brought  into  circulation. 
If  this  additional  supply  were  not  forthcoming,  money  would  rise 
in  value  ;  or,  in  other  words,  general  prices  would  decline.  Hence 
bills  of  exchange,  in  many  classes  of  transactions,  are  a  conven- 
ient and  complete  substitute  for  money.  Consequently,  if  it  were 
not  for  bills  of  exchange,  one  of  two  things  must  happen  :  either 
the  money  in  circulation  must  be  increased,  or  the  money  already 
in  circulation  must  become  more  valuable,  since  a  greater  amount 
of  money  will  be  required  to  carry  on  the  trade  and  commerce  of 
the  country.  But  to  say  that  money  becomes  more  valuable  is 
equivalent  to  stating  that  general  prices  decline. 

"It  therefore  appears  that  we  cannot,  by  a  simple  negative  or 
affirmative,  answer  the  question,  whether  an  increased  issue  of  bills 
of  exchange  affects  prices.  All  that  can  be  said  is  this  :  if  the 
buying  and  selling  now  carried  on  by  bills  of  exchange  were 
effected  by  money,  then  one  of  two  things  must  occur,  —  either 


378  HISTORY  OF   MONETARY  THEORIES. 

more  money  must  be  brought  into  circulation,  or  general  prices 
must  decline.  The  influence,  however,  which  is  exerted  upon 
prices  by  bills  of  exchange  is  not  due  to  any  thing  peculiar  in  the 
nature  or  form  of  a  bill  of  exchange  :  it  is  not  the  bill  which  pro- 
duces the  influence,  but  the  influence  is  produced  by  the  credit 
which  is  given.  The  bill  is  not  this  credit;  but  is  simply  a  testi- 
mony or  record  of  its  existence.  The  truth  of  this  assertion  is 
illustrated  by  the  fact,  that  buying  and  selling  may  be  carried  on 
by  book  credits,  instead  of  by  bills  of  exchange.  ...  In  this  case 
(the  ilkistration  given),  although  the  buying  and  selling  are  nom- 
inally made  for  money,  yet  the  resort  to  book  credits  enables  money 
to  be  as  completely  dispensed  with  as  if  bills  of  exchange  had 
been  used.  It  is  therefore  credit,  and  not  the  particular  form 
which  credit  may  assume,  that  enables  money  to  be  dispensed  with, 
and  consequently  produces  an  influence  on  prices."  ^ 

Experience  when  appealed  to  in  the  case  of  the  issue  of  the 
i^  60,000  of  notes,  as  assumed  in  the  first  of  the  preceding 
paragraphs,  would  have  shown  that  all  issued  would  return  to 
the  banker  for  redemption  regularly,  and  within  periods  of 
from  sixty  to  ninety  days  from  their  issue,  to  be  discharged  by 
an  equal  amount  of  coin,  or  the  equivalent  of  coin.  How  were 
these  to  be  met  ?  If  the  banker  discounted  bills  representing 
merchandise,  his  notes  would  be  returned  to  him  by  their 
makers  in  their  payment.  If  he  discounted  those  that  would 
not  be  paid,  then  the  notes  issued  would  have  to  be  presently 
taken  in  by  him,  by  paying  out  a  corresponding  amount  of  his 
reserve.  The  debts  created  by  their  issue  are  to  be  discharged 
by  their  use,  or  by  that  of  coin.  Every  note  issued,  therefore, 
must  have  a  provision  of  an  equal  amount  of  capital  for  its 
discharge,  and  must  be  discharged  by^  such  provision.  Its 
value  depends  upon  its  capacity  of  being  discharged,  of  being 
retired  from  circulation.  If  it  could  never  be  discharged,  it 
could  have  no  value.  Such  is  the  law  of  all  convertible  cur- 
rencies. Notes  get  into  circulation  upon  the  credit  of  the 
issuer  ;  but  it  is  always  upon  the  assumption  that  means,  their 
equivalent  in  value,  are  first  provided  for  their  redemption. 
Without  such  confidence,  no  one  would  take  them.  The  basis 
of  their  circulation  is  not  credit,  but  capital.  Credit  is  but 
another  word  for  confidence  that  such  capital  exists,  and  can 
always  be  had  when  wanted.  It  may  as  well  be  in  the  hands 
of  the  public  or  of  the  merchant,  and  on  its  way  to  the  con- 

1  Manual  of  Political  Economy,  pp.  427-433. 


HENRY   FAWCETT.  379 

sumer,  as  in  the  hands  of  the  issuer.  If  it  be  in  the  hands  of 
the  public  or  the  merchant,  then  X 8,000  is  all  that  the  issuer 
need  hold  against  an  issue  of  <£  60,000,  as  the  return  of  the 
notes  would  be  insured  by  the  capital  for  the  distribution  of 
which  they  were  the  instruments.  The  reserve  is  not  held  to 
meet  such  notes  as  occasionally  return,  such  as  are  assumed 
to  be  issued  in  excess  ;  for  the  reason  that  all  will  return 
within  their  appointed  periods.  Mr.  Fawcett  wholly  miscon- 
ceived the  law  or  nature  of  paper  money.  A  similar  answer 
may  be  given  to  his  statement  that  notes  can  be  substituted, 
as  currency,  for  a  corresponding  amount  of  gold  ;  the  saving  to 
the  country  being  in  the  amount  of  the  substitution,  "  because 
notes,  which  are  simply  pieces  of  paper  of  no  intrinsic  value, 
perform  with  equal  efficiency  all  the  purposes  which  were 
previously  fulfilled  by  the  gold  which  is  now  supposed  to  be 
dispensed  v^ih."  Notes  which  are  constantly  being  retired 
from  circulation  cannot  take  the  place  of  gold  which  remains, 
as  currency,  unchanged  and  permanently  in  circulation. 
Whether  convertible  or  not,  they  cannot  perform,  with  equal 
efficiency,  all  the  purposes  which  are  fulfilled  by  gold.  Their 
value  is  representative,  not  intrinsic ;  that  of  gold  is  intrinsic, 
not  representative.  Notes  become  valueless  if  their  constituent 
become  valueless;  the  value  of  gold  depends  upon  nothing 
but  itself.  Gold  is  legal  tender  in  the  discharge  of  contracts ; 
paper,  such  as  that  of  which  Mr.  Fawcett  was  speaking,  is  not. 
Gold  can  be  used  in  the  arts  ;  notes  cannot.  Gold  can  dis- 
charge indebtedness  to  foreign  countries  ;  notes  cannot.  Gold 
can  discharge  balances  arising  in  the  domestic  trade  of  a 
country ;  notes  cannot.  Gold  can  be  held  as  reserves  by  the 
issuers  of  paper  money,  and  by  society,  and  for  all  time  ;  notes 
cannot  in  either  case,  as  they  are  necessarily  speedily  retired 
by  the  use,  or  disappearance  from  any  cause,  of  their  constitu- 
ent. Notes  are  accepted  within  the  country  in  which  they  are 
issued,  by  reason  of  their  representative  character.  They  can 
perform  only  one  function  of  gold,  —  that  of  effecting  domestic 
exchanges.  Mr.  Fawcett  should  have  been  logician  enough  to 
have  seen  that  the  less  cannot  include  the  greater.  Paper 
discharges  gold  from  use  in  one  particular ;  but  can  no  more 
be  substituted  for  it  in  all  the  functions  which  the  latter  has 
to  perform  in  the  economy  of  society  than  a  mere  promise 
can  be  substituted  for  the    performance,  or  sugar  for  iron. 


380  HISTORY   OF   MONETARY   THEORIES. 

As  the  substitution  is  impossible,  the  advantage  resulting 
therefrom  is  impossible.  Great  advantages  result  from  the  use 
of  paper  money,  and  in  ratio  to  its  use,  in  the  same  way  that 
great  advantages  result  from  the  use  of  ships  and  railroads. 
In  ratio  to  its  use,  will  the  gold  of  a  country,  or  the  power  to 
command  and  consume  it,  be  increased.  But  paper  can  no 
more  be  substituted  for  gold  than  can  ships  and  railroads. 

Mr.  Fawcett's  theory  of  the  effect  upon  prices  of  credit  in 
the  form  of  paper  money  is  singularly  unphilosophic  and  in- 
adequate. With  liim,  the  whole  thing  is  a  mere  piece  of 
mechanism :  so  much  money,  so  much  price  ;  and  the  re- 
verse. His  conclusions  are  based  upon  assumptions  wholly 
impossible  in  themselves.  "  If,"  he  says,  "  the  amount  of 
money  be  reduced  one-half,  that  of  merchandise  remaining  the 
same,  prices  will  fall  one-half ;  if  it  be  increased,  prices  will 
rise  in  like  ratio.  So,  if  the  production  of  all  kinds  of  wealth 
in  a  country  be  doubled,  and  every  one  doubles  his  purchase 
of  commodities,  the  amount  of  money  in  it  remaining  the  same, 
prices  will  fall  one-half."  But  production  and  consumption 
cannot  be  doubled,  the  amount  of  money  remaining  the  same  ; 
both  must,  as  a  rule,  proceed  in  ratio  to  the  amount  of  money 
in  circulation.  Paper  money  is  the  symbol  of  merchandise  : 
the  one  must  be  in  ratio  to  the  other,  as  the  necessary  condi- 
tion of  production  and  consumption.  He  might  as  well  have 
assumed  the  commerce  of  a  country  to  be  doubled  for  the 
reason  that  the  ships  employed  carried  twice  as  much  as  they 
have  the  ability  to  carry.  His  statements  and  illustrations 
are  nothing  less  than  contradictions  in  terms.  Credit  in  the 
form  of  money  has  an  effect  entirely  different  from  that  due 
to  its  quantity.  "If,"  says  Fawcett,  in  effect,  "  one  would 
lift  two  pounds  of  merchandise  with  a  one  pound  weight,  he 
must  double,  or  reduce  one-half,  the  length  of  one  arm  of  the 
scale."  The  true  object  of  paper  money  is  to  raise  the  two 
pounds  of  merchandise  without  the  employment  of  any  weight 
whatever.  So  far  as  this  can  be  done,  can  the  cost  of  the 
operations  of  weighing  be  saved,  and  prices  reduced  in  like 
ratio  ;  and  so  far  can  the  coin  of  a  country  be  employed  in 
the  discharge  of  functions  peculiar  to  itself,  and  which  neither 
symbols  nor  paper  money  of  any  kind  can  discharge.  Such 
a  relation  of  currency  to    prices  wholly   escaped   him.     He 


THE   NATTJEE   AND   EFFECT   OF   CREDIT.  381 

assumed  an  increase  of  currency  to  be  followed  by  an  increase 
of  prices.  The  whole  question  turns  upon  the  nature  of 
the  currency.  If  it  be  neither  capital  nor  the  representative  of 
capital  (merchandise)  ;  if  it  be  that  kind  of  currency  which  can 
be  substituted  for  gold,  like  legar  tender,  then  he  was  quite 
right ;  for  an  increase  of  such  currency  always  tends  to  ad- 
vance prices  in  being  in  excess  of  the  means  of  consumption. 
If  it  be  capital  or  the  representative  of  capital,  then  he  was 
wholly  wrong ;  for  prices  must  be  in  ratio  to  the  amount  of 
merchandise  fitted  for  consumption,  or  in  ratio  to  the  perfection 
of  the  instruments  for  its  distribution. 

The  same  remarks  apply  with  equal  force  to  bills  as  currency 
as  to  bank-notes.  Bills  are,  equally  with  bank-notes,  the  rep- 
resentatives of  values,  —  of  merchandise  ;  and  would  have  no 
value  but  for  their  capacity  of  being  discharged  by  it.  As 
they  must  always  speedily  disappear  if  they  possess  any  value, 
they  can  no  more  be  substituted  for  coin  than  can  notes.  j\Ir. 
Fawcett  predicates  the  same  results  of  them  as  of  bank-notes, 
and  assumes  that  their  use  may  discharge  that  of  gold  alto- 
gether. An  increase  in  their  amount  puts  up  prices  ;  a  de- 
crease in  it  puts  them  down.  Suppose,  he  says,  "  that  all  the 
commodities  which  are  now  bought  and  sold  by  means  of  bills 
of  exchange  were  paid  for  by  money,  a  largely  increased 
amount  of  money  would  be  required  to  be  brought  into  circu- 
lation." But  if  bills  of  exchange,  that  is,  symbolic  money, 
were  not  used,  "  all  the  commodities  now  bought  and  sold " 
would  not  be  bought  and  sold,  — probably  not  one-quarter  the 
present  amount.  They  would  not  exist.  They  are  bought  and 
sold,  that  is,  they  do  exist,  by  reason  of  the  use  of  symbolic 
money.  With  a  retui-n  to  a  metallic  currency,  the  amount  of 
commodities  would  not  only  be  greatly  reduced,  but  the  cost 
to  consumers  would  be  greatly  increased. 

Such  is  the  confusion  which  prevails  as  to  the  nature  and  ef- 
fect upon  prices,  of  credits  in  the  forms  in  which  they  are  chiefly 
used,  that  it  may  be  well,  at  the  risk  of  some  repetition,  to  re- 
state the  whole  subject.  The  lending  of  his  name  by  a  party 
possessed  of  means  in  real  estate  or  securities,  to  another  of  in- 
tegrity and  enterprise,  is  one  of  the  usual  illustrations  of  the 
beneficent  results  that  may  flow  from  the  use  of  credits.  The 
capitalist,  as  he  is  termed,  will  make  a  profit  in  the  form  of 


382  HISTORY   OF    MONETAHY   THEORIES. 

interest  upon  the  amount  of  the  credit  he  extends.  The  bor- 
rower gets  that  upon  which  he  can  profitably  exercise  his  in- 
dustry and  skill.  But  such  credit,  as  a  rule,  is  valueless  until 
it  is  turned  by  a  Bank  into  money.  This  done,  the  borrower 
contracts  to  pay  the  amount  of  the  loan  in  money,  within  a 
comparatively  brief  period.  This  is  to  be  provided  out  of  the 
proceeds  of  the  enterprise  or  industry  in  which  he  may  engage. 
If  he  cannot  turn  this  to  account  within  the  time  within  which 
the  loan  of  the  Bank  is  to  be  repaid,  then  the  credit  will  prove 
to  him  a  source  of  loss  far  greater  than  its  amount.  It  was 
the  means  of  anticipating  —  of  putting  into  the  form  of  money 
—  that  which  perhaps  existed  only  in  idea,  or  which,  if  well 
based,  might  require  years  for  its  proper  development.  If  the 
borrower  cannot  pay,  then  the  capitalist,  at  the  last  moment, 
will  be  called  upon.  He  may  not  be  able  to  take  in  his  credit 
immediately,  although  possessed  of  large  means  ;  and,  conse- 
quently, becomes  involved  and  discredited  by  the  operation. 
If  he  cannot  seasonably  pay,  the  Bank  must  take  in  its  notes, 
by  paying  out  a  corresponding  amount  of  coin.  Its  ability  to 
discount,  and  with  it  the  amount  of  the  currency,  will  be  re- 
duced in  like  degree.  The  currency,  which  was  inflated  by 
the  amount  of  the  discount  above  the  ordinary  range,  is  now 
reduced  as  far  below  it ;  and  prices  fall  in  like,  or  in  still  greater, 
ratio.  All  credits,  therefore,  of  the  kind  described  produce, 
as  a  rule,  two  effects:  a  rise,  from  an  issue  of  instruments  in 
excess  of  the  means  of  consumption ;  and  then  a  fall,  far 
greater  and  of  longer  continuance  than  the  rise,  from  a  reduc- 
tion of  the  currency  as  far  below  as  it  had  exceeded  its  ordinary 
range,  and  from  the  improvident  expenditure  of  capital  equal 
to  the  amount  of  the  credit  given.  Such  credits,  therefore, 
should  never  be  made  the  basis  of  industrial  enterprises.  An- 
other form  of  credit,  the  process  of  which  has  already  been 
fully  detailed,  is  that  by  which  bills  given  in  the  purchase  of 
merchandise,  for  its  distribution,  are  converted  by  Banks  into 
paper  money,  by  means  of  which  producers  can  anticipate  the 
sale  of  their  products  and  collection  of  the  proceeds.  By  this 
process  they  are  enabled  to  continue  their  industries  on  their 
wonted  scale.  The  effect  is  greatly  to  reduce  prices  to  the 
consumer,  while  usually  increasing  t;lie  profits  of  the  producer. 
A  third  form  —  that  out  of  which  bills  which  form  the  basis  of 
paper  money  chiefly  arise  —  is  the  intrusting  to  the  merchant 


HENKY  FAWCETT.  383 

such  possession  of  that  in  which  he  deals  as  is  necessar}^  for 
the  discharge  of  his  particular  function.  Such  credit  may  be 
given  by  bill,  or  by  book  account.  By  its  means,  merchandise 
reaches  the  consumer  with  no  other  burden  resting  upon  it 
than  cost,  and  the  necessary  charge  and  .compensation  for  the 
labor  employed  in  its  distribution.  When  it  reaches  the  con- 
sumer, and  is  paid  for,  the  proceeds  return  through  the  same 
channel  through  which  it  was  distributed,  discharging  the  obli- 
gations incurred  in  the  several  stages  ;  to  be  finally  paid  over  to 
the  producer,  or  to  the  Bank,  assuming  the  merchandise  to  have 
been  sold  upon  credit  and  a  bill  given  therefor,  and  turned 
into  notes.  The  credit  last  described  exerts  a  most  powerful 
influence  in  the  reduction  of  prices.  In  one  sense,  it  includes 
the  previous  one,  as  it  lays  the  foundation  for  bankers'  credits, 
to  be  given  in  the  discount  of  bills.  The  two  last  are  the 
only  ones  that  act  to  any  considerable  extent  upon  prices  ;  and 
their  effect  in  the  end  is  always  to  produce  a  fall  when  the 
prices  which  the  consumer  pays,  as  well  as  those  which  the 
producer  realizes,  are  taken  into  account.  Were  the  effect  of 
credits,  in  their  proper  sense,  to  raise  instead  of  reducing 
prices,  they  would  be  the  greatest  of  evils,  instead  of  being,  as 
they  are,  most  valuable  contrivances  in  the  economy  of 
society. 

The  only  effect  of  the  Act  of  1844  would  be  to  allow  per- 
fect freedom  in  the  form  of  the  currency  issued.  There  might 
be  an  increased  use  of  notes,  and  fewer- checks  ;  but  this  is  not 
probable. 

"Inconvertible  notes,"  says  Fawcett,  "will  be  as  freely  accepted 
as  coin,  if  people  have  confidence  that  an  inconvertible  currency  is 
only  a  temporary  expedient,  and  that  the  government  will  take 
scrupulons  care  never  to  ]icrmit  the  issue  of  inconvertible  notes 
to  exceed  an  amount  which  can  with  certainty  be  ultimately  re- 
deemed. 

"  It  is,  therefore,  possible  to  conceive  that  exceptional  circuni- 
stances  may  occur,  during  which  an  inconvertible  currency  may  be 
issued,  if  kept  Avithin  proper  limits,  without  disturbing  the  finances 
of  the  country.  For  instance,  there  can  be  little  doubt  that  the 
American  civil  war  created  a  demand  for  a  greater  amount  of 
money  to  be  circulated  in  that  country.  More  money  was  in  fact 
required  ;  because  the  raising  of  a  large  army,  and  supporting  it  in 
the  field,  would  render  it  necessary  to  make  many  more  payments 
in  money.     If  the  issue  of  an  inconvertible  currency  in  America 


384  HISTORY  OF  MONETARY  THEORIES. 

had  gone  no  further  than  to  satisfy  this  demand  for  a  greater  sum 
of  money  to  be  brought  into  circulation,  no  one's  confidence  in  the 
financial  credit  of  the  government  would  have  been  shaken,  and 
the  inconvertible  cuiTcncy  would  have  exerted  no  effect  on  prices. 
But  the  American  government  far  outstepped  their  legitimate 
limits. "  ^ 

People  accept  an  inconvertible  currency  of  government 
notes,  as  it  will  discharge  their  own  debts  existing  at  the  time, 
by  virtue  of  its  being  legal  tender,  and  from  a  belief  that  it 
will  speedily  be  redeemed  by  an  equivalent  in  some  form.  If 
government  be  competent  to  issue  it,  it  would  have  a  high 
value  for  a  time,  even  if  it  were  believed  that  it  would  not  be 
paid.  While  there  are  grave  objections  to  such  a  currency, 
says  Mr.  Fawcett,  it  is  possible  that  if  its  issue  were  confined 
within  reasonable  limits,  it  might  be  issued  mthout  disturbing 
the  finances  of  a  country.  If,  for  example,  the  United  States, 
in  the  late  civil  war,  had  issued  notes  only  in  ratio  to  their  in- 
creased necessity  for  money,  the  issue  could  have  exerted  no 
influence  over  prices.  The  yearly  average  expenditures  of 
that  country  previous  to  the  war  equalled,  say,  $45,000,000. 
They  went  up  during  the  war  to  $750,000,000  annually,  for 
three  years.  The  demand  for  money,  measured  by  the  price 
of  the  notes  issued,  exceeded  sixteen-fold  the  amount  of 
previous  expenditure.  To  that  extent,  said  Mr.  Fawcett, 
government  notes  might  be  issued,  and  the  currency  increased 
in  like  ratio,  without  exerting  any  influence  upon  prices ;  for 
the  reason  that  the  money  issued  would  only  be  in  ratio  to  the 
increased  necessity  for  its  use.  But  how  could  the  expendi- 
tures of  a  government  be  increased  sixteen-fold,  or  even  eight- 
fold, without  any  increase  of  capital,  or  fund  to  draw  upon,  and 
prices  remain  at  their  old  figures  ?  It  is  the  same  as  to  say  that 
a  demand  multiplied  by  one  per  cent  equals  a  demand  multi- 
plied by  eight  or  sixteen  per  cent.  If  gold  could  have  been 
supplied  wherewith  to  meet  all  expenditures  growing  out  of 
the  war,  prices  would  still  have  increased  enormously,  from  the 
excess  of  demand  over  supply.  Gold  was  not,  or  could  not  be, 
had.  Legal-tender  could  ;  and  prices  rose  in  ratio  to  its  use, 
and  to  the  necessities  of  the  government.  At  one  time,  $281 
of  paper  would  purchase  only  $100  of  coin.     Prices  rose,  there- 

1  Manual  of  Political  Economy,  p.  443. 


^Y.    STANLEY   JEVONS.  385 

fore,  in  ratio  to  the  demand ;  in  other  words,  in  ratio  to  the 
inflation  of  the  currency.  If  Mr.  Fawcett  had  paused  long 
enough  to  ask  himself  weather  or  not  a  sovereign  to  be  re- 
ceived six  months  hence  had  the  same  value  to  the  person  who 
was  to  receive  it  as  a  sovereign  in  hand  ;  or  whether  a  govern- 
ment note  having  one  j'ear  to  run,  without  interest,  equalled 
in  value  its  note  having  the  same  time  to  run,  bearing  interest, 
—  the  answer,  properly  made,  would  have  unlocked  to  him  all 
the  mysteries  of  money.  Instead  of  this,  he  contented  himself 
with  a  mild  restatement  of  all  the  old  dogmas,  every  one  of 
which  he  accepted  without  reservation,  and  every  one  of  which 
is  exactly  opposed  to  the  principles  upon  which  money  is  l)ased. 
It  must,  however,  be  said  in  his  favor,  that  his  stjde  is  in  agree- 
able contrast  to  the  incoherent  extravagance  of  Macleod  and 
the  fantastic  nonsense  of  Bonamy  Price. 

Mr.  W.  Stanley  Jevons,  Professor  of  Political  Economy  in 
the  University  of  London,  in  a  recently  published  work,  entitled 
"  Money  and  the  Mechanism  of  Exchange,"  gives  the  follow- 
ing account  of  the  nature  of  paper  money,  and  the  manner  in 
which  it  gets  into  use  :  — 

"  Metallic  money,  as  we  have  seen,  immensely  facilitates,  and, 
so  to  speak,  lubricates  the  operation  of  exchange.  But  nations  em- 
ploying gold  and  silver  money  have  usually  discovered,  in  the  course 
of  time,  that  tokens  of  small  metallic  value,  or  even  pieces  of 
leather  and  paper  of  nominal  value,  might  be  passed  from  hand  to 
hand  as  signs  of  the  ownership  of  coins.  That  which  replaces  gold 
or  silver  or  copper  money  is  at  first  of  a  purely  representative 
character.  But,  when  a  community  has  become  thoroughly  habitu- 
ated to  the  circulation  of  a  currency  of  this  character,  it  is  often 
found  possible  to  remove  the  basis  of  valuable  metal  which  it  is 
supposed  to  represent,  and  yet  to  maintain  the  valueless  bits  of 
leather  or  paper  in  circulation  as  before.  Thus  arises  the  abnor- 
mal ])henomenon  known  as  an  inconvertible  paper  money.  .  .  . 

"  Although  we  now  distinguish  money  according  as  it  is  metallic 
or  paper  money,  because  paper  has  in  recent  times  been  universally 
adopted  as  the  material  for  representative  money,  yet  it  is  well  to 
remember  that  various  other  substances  have  been  used  for  the 
purpose.  We  may  pass,  in  fact,  by  gradual  steps,  from  the  perfect 
standard  coins,  whose  nominal  value  is  coincident  with  their  metal- 
lic vnlue,  to  worthless  bits  of  paper,  which  are  yet  allowed  to  stand 
for  thousands,  or  even  millions,  of  pounds  sterling.  .  .  .  ^ 

"  Persons  who  have  long  been  accustomed  to  pay  away  certain 
pieces  of  paper  without  loss  will  continue  to  regard  them  as  good 

1  Money  and  the  Mechanism  of  Exchange,  pp.  191-194. 

25 


386  HISTORY   OF   MONETARY   THEORIES. 

currency,  until  some  rude  shock  is  given  to  their  confidence.  This 
may  go  so  far  that  a  dirty  bit  of  paper,  containing  a  promise  to  pay 
a  sovereign,  will  be  actually  preferred  to  the  beautiful  gold  coin 
which  it  promises.  The  currency  of  Scotland  is  a  standing  proof 
of  this  assertion ;  and  the  same  may  be  said  of  Norway,  where, 
until  1874,  no  gold  at  all  was  in  circulation,  and  notes  for  one,  five, 
or  ten  dollars  formed  the  principal  part  of  the  cun-ency. 

"  There  is  one  all-important  point  in  which  representative  differs 
from  metallic  money :  it  will  not  circulate  beyond  the  boundaries 
of  the  district  or  country  where  it  is  legally  cuiTent  or  habitually 
employed.  Xo  doubt,  Bank  of  England  notes  are  frequently  carried 
abroad  by  travellers,  and  are  in  most  places  readily  exchanged  for 
the  moneV  of  the  locality ;  but  they  never  circulate,  and  are  treated 
as  bills  upon  London,  forming  a  convenient  mode  of  remittance. 
They  do  not  satisfy  a  debt  from  this  to  another  country  ;  but  rather 
create  it,  an  English  bank-note  in  the  hands  of  a  Paris  banker  rep- 
resenting a  claim  which  he  has  upon  the  Bank  of  England.  The 
only  money  which  can  really  be  exported  in  pajTnent  of  debts  due 
to  foreign  merchants  is  standard  metallic  money.  Hence  paper 
money  has  exactly  the  same  capacity  for  driving  out  standard  money 
that  light  or  depreciated  coins  possess. 

"  In  the  case  of  inconvertible  notes,  this  has  always  been  most  ob- 
vious. As  the  quantity  of  such  notes  issued  progressively  increases, 
as  almost  always  happens,  coin  must  be  exported ;  otherwise  the 
currency  would  be  excessive.  But  when  most  of  the  coin  is 
gone,  need  begins  to  be  felt  for  making  foreign  pajinents,  and  then 
the  value  of  the  paper  falls  below  that  of  the  coin  which  it  is  sup- 
posed to  correspond  to."  ^ 

As  all  convertible  currencies,  as  already  shown,  are  regularly 
retired  within  periods  of,  say  ninety  days  from  their  issue, 
worthless  bits  of  leather  and  paper  can  only  "  stand  for  thou- 
sands and  millions  sterling  *'  for  such  a  length  of  time.  If  they 
get  into  circulation,  confidence  must  therefore  be  very  fre- 
quently shocked.  It  does  happen  that  large  amounts  of  paper 
money  get  into  circulation,  having  no  more  value  than  worth- 
less bits  of  leather  or  paper ;  but  they  get  into  circulation  for 
the  reason  that  it  is  always  believed  that  a  metallic  basis  of 
value  underlies  them.  If  they  have  no  such  basis,  those  who 
take  them  are  deceived.  Mr.  .Jevons  fortifies  his  statement  by 
reference  to  the  notes  of  Scotch  Banks  ;  but  confidence  was 
never  shocked  in  reference  to  these,  for  the  reason  that  it  was 
always  known  that  they  rested  on  a  basis  of  metals,  or  upon 
that  which  would  produce  metals.  He  assumed  that  worthless 
bits  of  paper  —  the  basis  of  metal  being  wholly  removed  — 

1  Money  and  the  Mechanism  of  Exchange,  pp.  214,  215. 


TV.    STA>'LEY   JEVOXS.  387 

circulated  bj  the  same  law  as  that  wliicli  controls  the  circula- 
tion of  coin,  or  that  which  was  convertible  on  demand  into 
coin.  Paper  money,  he  continues,  has  exactly  the  same  capa- 
city for  dri^-ing  out  standard  money  that  light  or  depreciated 
coins  possess.  What  kind  of  paper  money?  Convertible 
paper  money  exerts  no  such  tendency :  on  the  contrary,  its 
tendencv  is  to  brinsr  metallic  monev  into  the  countrv  to  form 
the  basis  of  its  issue.  The  two  are  equal  in  value,  and  move 
harmoniously  side  by  side.  Debased  coin  drives  out  standard 
coin,  only  for  the  reason  that  it  has  the  same  competency  in 
the  payment  of  debts;  and,  of  two  equally  competent  instru- 
ments, the  less  costly  vnH  be  preferred.  The  example  of  Eng- 
land, in  1694,  is  strikingly  in  point.  The  coin  was  debased, 
but  not  demonetized ;  and  those  who  had  occasion  to  pay 
debts  would  use  that  which  would  cost  the  least.  So  soon  as 
the  debased  coin  was  demonetized,  it  passed  at  its  real  —  not 
at  its  denominational  —  value.  ^Ir.  Jevons  holds  that  all  kinds 
of  paper  money  displace  corresponding  amounts  of  coin  :  or, 
to  speak  more  to  the  point,  he  held  to  the  traditions  which  he 
found  in  the  books. 

Again :  — 

"  "We  may  now  proceed  with  advantage  to  consider  the  Tarious 
methods  in  which  the  issue  of  paper  money  may  be  conducted. 
This  question  is,  perhaps,  the  most  vexed  and  debatable  one  in  the 
whole  sphere  of  Political  Economy  ;  but,  by  carefully  adhering  to 
the  analysis  of  facts,  we  may,  perhaps,  get  a  view  of  the  subject  free 
from  the  srreat  perplexities  in  which  it  is  commonly  involved.  The 
elementary  principles  of  the  subject  are  not  of  a  complex  character ; 
and,  if  we  hold  tenaciously  to  those  principles,  we  may,  perhaps,  be 
saved  from  that  dangerous  kind  of  intellectual  vertigo  which  often 
attacks  writers  on  the  currency. 

"  The  State  may  either  take  the  issue  of  representative  money 
into  its  own  hands,  as  it  takes  the  coining  of  money;  or  it  may 
allow  private  individuals,  or  semi-public  companies  and  corpora- 
tions, to  undertake  the  work  under  more  or  less  strict  legislative 
control.  We  will  afterwards  briefly  consider  the  relative  advan- 
tages of  ofoveniraent  and  private  issues ;  but,  in  either  case,  we  may 
lay  down  the  following  series  of  methods,  according  to  which  the 
amount  of  issue  may  be  regulated,  and  the  performance  of  the 
promises  guaranteed.''  ^ 

What  would  the  money  of  a  State  represent?  A  beggared 
treasury  and  a  parcel  of  ignorant  and  listless  officials.     Xo 

1  iloney  and  the  Mechanism  of  Exchange,  pp.  217,  218. 


888  HISTORY   OF   MONETARY  THEORIES. 

State  money  issued  as  currency  ever  represented  any  thing 
else.  Whoever  issues  it,  however,  or  currency  in  any  form, 
has  nothing  to  fear,  so  long  as  they  observe  "  fourteen  series  of 
methods  "  laid  down  and  fully  exploited  by  Mr.  Jevons.  We 
spare  the  reader  their  exploitation,  in  order  not  to  inflict  upon 
him  the  money-writer's  malady.  They  should,  however,  be 
none  the  less  studied.  They  shoidd  be  placarded  before  the 
desk  of  every  young  man  ambitious  to  rise  and  shine  in  the 
financial  world.  The  heads  or  titles  of  Mr.  Jevons's  "  fourteen 
series  of  methods  "  are  as  follows  :  — 

1.  The  Simple  Deposit  Method. 

2.  The  Partial  Deposit  Method. 

3.  The  Minimum  Reserve  Method. 

4.  The  Proportional  Reserve  Method. 

5.  The  Maximum  Issue  Method. 

6.  The  Elastic  Limit  Method. 

7.  The  Documentary  Reserve  Method. 

8.  The  Real  Property  Reserve  Method. 

9.  The  Foreign  Exchanges  Method. 

10.  The  Free  Issue  Method. 

11.  The  Gold  Par  Method. 

12.  The  Revenue  Payments  Method. 

13.  The  Deferred  Convertibility  Method. 

14.  The  Paper  Money  Method.^ 

The  following  is  Mr.  Jevons's  mode  of  maintaining  the  value 
of  inconvertible  paper  money  at  the  par  value  of  gold  :  — 

"  Assuming  an  inconvertible  paper  currency  to  be  issued,  and  to 
be  entirely  in  the  hands  of  government,  many  of  the  evils  of  such 
a  system  might  be  avoided,  If  the  issue  were  limited  or  reduced  the 
moment  that  the  price  of  gold  in  paper  rose  above  par.  As  long 
as  the  notes,  and  the  gold  coin  which  they  pretend  to  represent, 
circulate  on  a  footing  of  equaUty,  they  are  as  good  as  if  convert- 
ible." ^ 

Admitted.  But  suppose  that  a  person  holding  sovereigns 
will  not  exchange  them  for  equal  amounts  of  inconvertible 
paper,  what  then  ?   We  know  of  no  other  advice  than  that  given 

1  Several  of  the  above  methods  have  much  to  commend  them  to  the  people 
of  the  United  States  ;  especially  the  "  Maximum  Issue  IMethod,"  the  "  Elastic 
Limit  Method,"  the  "  Free  Issue  Method,"  and  the  "  Deferred  Convertibility 
MetJiod."  The  last  two,  it  is  probable,  would  be  the  most  popular.  The  others, 
however,  would  be  received  with  more  or  less  favor.  It  ia  to  be  regretted  that 
space  does  not  allow  their  further  presentation  here. 

2  Money  and  the  Mechanism  of  Exchange,  p.  231. 


W.    STANLEY   JEVOXS.  '      389 

by  Dogberry  to  the  watch  :  "  If  he  will  not '  exchange,'  let  him 
go,  and  thank  God  you  are  rid  of  a  knave  "  ! 

Again :  — 

"  We  now  come  to  the  undisguised  paper  money  issued  by  govern- 
ment, and  ordered  to  be  received  as  legal  tender.  Such  inconvert- 
ible paper  notes  have  in  all  instances  been  put  in  circulation  as 
convertible  ones,  or  in  the  place  of  such  ;  and  they  are  always  ex- 
pressed in  terms  of  money.  The  French  mandats  of  one  hundred 
francs,  for  instance,  bear  the  ambiguous  phrase,  "  Bon  pour  cent 
francs."  The  wretched  scraps  of  paper  which  circulate  in  Buenos 
Ayres  are  marked  "  Un  Peso  Moneda  Corriente,"  reminding  one 
of  the  time  when  the  peso  was  a  heavy  standard  coin.  After  the 
promise  of  payment  in  coin  is  found  to  be  illusory,  the  notes  still 
circulate,  partly  from  habit,  partly  because  the  people  must  have 
some  currency,  and  have  no  coin  to  use  for  the  purpose,  or,  if  they 
have,  carefully  hoard  it  for  profit  or  future  use.  There  is  plenty  of 
evidence  to  prove  that  an  inconvertible  paper  money,  if  carefully 
limited  in  quantity,  can  retain  its  full  value.  Such  was  the  case 
with  the  Bank  of  England  notes  for  several  years  after  the  suspen- 
sion of  specie  payments  in  1797  ;  and  such  is  the  case  with  the 
present  notes  of  the  Bank  of  France."  ^ 

After  what  has  preceded,  the  above  paragraph  does  not  call 
for  comment. 

"  When  prices  are  at  a  certain  level,"  says  Mr.  Jevons,  "  and 
trade  in  a  quiescent  state,  a  single  banker  is,  no  doubt,  unable  to 
put  into  circulation  more  than  a  certain  quantity  of  bank-notes.  He 
cannot  produce  a  greater  effect  upon  the  whole  cuiTcncy  than  a 
single  purchaser  can,  by  his  sales  or  purchases,  produce  upon  the 
market  for  corn  or  cotton.  But  a  number  of  bankers,  all  trying  to 
issue  additional  notes,  resemble  a  number  of  merchants  offering  to 
sell  com  for  future  delivery ;  and  the  value  of  gold  will  be  affected, 
as  the  price  of  corn  certainly  is.  We  are  too  much  accustomed  to 
look  upon  the  value  of  gold  as  a  fixed  datum  line  in  commerce  ;  but, 
in  reality,  it  is  a  very  variable  thing.  .  .  .  Every  one  who  promises  to 
pay  gold  on  a  future  day,  thereby  increases  the  anticipated  supply 
of  gold  ;  and  there  is  no  limit  to  the  amount  of  gold  which  can  thus 
be  thrown  upon  the  market.  Every  one  who  draws  a  bill  or  issues 
a  note,  unconsciously  acts  as  a  "  bear "  upon  the  gold  market. 
Every  thing  goes  well,  and  apparent  prosperity  falls  upon  the  whole 
community,  so  long  as  these  promises  to  pay  gold  can  be  redeemed, 
or  replaced  by  new  promises.  But  the  rise  of  prices  thus  produced 
turns  the  foreign  exchanges  against  the  country,  and  creates  a 
balance  of  indebtedness  which  must  be  paid  in  gold.  The  basis  of 
the  whole  fabric  slips  away,  and  produces  that  sudden  collapse 
known  as  a  commercial  crisis."  ^ 

1  Money  and  the  Mechanism  of  Exchange,  pp.  234,  235. 

2  Money  and  tlie  Mechanism  of  Exchange,  pp.  314-316. 


390  HISTORY   OF   MOXETAKY   THEORIES. 

We  are  afraid  that  gold  cannot  be  thrown  in  any  amount 
upon  the  market,  simply  by  the  issue  of  promises  to  paj  it  at 
a  future  day ;  and,  also,  that  Mr.  Jevons's  illustrations  borrowed 
from  the  stock  market  will  hardly  stand  a  critical  examina-, 
tion.  A  "bear"  sale  is  one  in  which  the  seller  contracts  to 
make  future  delivery  of  somethins^,  —  not  money,  —  receivins: 
its  present  price  in  money.  When  a  banker  issues  his  notes, 
promising  to  pay  a  certain  amount  of  coin,  he  takes  the  obli- 
gations of  those  who  receive  them  to  repay  at  a  future  day  an 
equal,  and,  in  fact,  a  greater,  amount  of  coin  as  compensation 
for  standing  in  the  gap  for  the  time  that  his  borrowers'  obliga- 
tions have  to  run.  As  he  may  be  called  upon  to  pay  all  his  lia- 
bilities immediately  in  coin,  he  must  make  provision  of  coin  in 
ratio  to  the  amount  of  his  notes.  In  other  words,  he  "  bulls  " 
the  gold  market  just  in  ratio  to  the  extent  of  his  operations. 

"  What  is  true  of  credit  generally,"  says  Mr,  Jevons,  "  is  still 
more  true  of  the  special  form  of  credit  involved  in  Bank  promissory 
notes.  These  purport  to  be  payable  in  gold  coin  on  demand,  so 
that  they  are  taken  by  every  one  as  equivalent  to  the  coin.  Even 
bills  of  exchange  can  be  paid  in  notes ;  and,  as  regards  internal 
trade,  no  difficulty  would  be  felt  in  maintaining  credit  so  long  as 
promises  to  pay  gold  circulate  instead  of  gold.  Bat  foreigners  will 
not  hold  such  promises  on  the  same  footing ;  and,  if  the  exchanges 
are  against  us,  the  metallic,  not  the  paper,  part  of  the  currency 
will  go  abroad.  It  is  at  this  moment  that  bankers  will  find  no  dif- 
ficulty in  expanding  their  issues ;  because  many  persons  have  claims 
to  meet  in  gold,  and  the  notes  are  regarded  as  gold.  The  notes 
will  thus  conveniently  fill  up  the  void  occasioned  by  the  exporta- 
tion of  specie  ;  prices  will  be  kept  up  ;  prosperity  will  continue  ;  the 
balance  of  foreign  trade  will  be  still  against  us ;  and  the  game  of 
replacing  gold  by  promises  will  go  on  to  an  unlimited  extent,  until 
it  becomes  actually  impossible  to  find  more  gold  to  make  neces- 
sary payments  abroad.  .  .  . 

"  According  to  the  view  which  I  adopt,  the  issue  of  notes  is 
more  analogous  to  the  royal  function  of  coinage  than  to  the  ordinary 
commercial  operation  of  drawing  bills.  We  ought  to  talk  of  coining 
notes,  as  John  Law  did ;  for,  though  the  design  is  impressed  on 
paper  instead  of  metal,  the  function  of  the  note  is  exactly  the  same 
as  that  of  a  representative  token.  As  to  the  right  to  issue  promises, 
it  no  more  exists  than  the  right  to  establish  private  mints.  For  our 
present  purposes,  that  alone  is  right  which  the  legislature  declares 
to  be  expedient  to  the  community  at  large.  As  almost  everj'  one 
has  long  agreed  to  place  the  coinage  of  money  in  the  hands  of  the 
executive  government,  so  I  believe  that  the  issue  of  paper  represen- 
tative money  should  continue  to  be  practically  in  the  hands  of  the 
government,  or  its  agents,  acting  under  the  strictest  legislative  con- 


PRESENT   CON-DITION   OF   ECONOMIC  SCIENCE.  391 

trol.  M.  Wolovrski,  in  his  admirable  vrorks  on  banking,  has  main- 
tained that  the  issue  of  notes  is  a  function  distinct  from  the  ordinary 
operations  of  a  banker ;  and  Mr.  Gladstone  has  allowed  that  the 
distinction  is  a  wholesome  and  vital  one.  Bankers  enjoy  the  utmost 
degree  of  freedom  in  this  country  at  present  in  every  other  point ; 
so  that  it  is  wholly  a  confusion  of  ideas  to  speak  of  the  unrestricted 
emission  of  paper  representative  money  as  a  question  of  free  bank- 
ing." 1 

The  preceding  paragraphs  may  serve  as  illustrations  of  the 
History  of  Monetary  Theories. 

A  striking  illustration  of  the  present  condition  of  the  science 
of  Political  Economy  is  furnished  by  Mr.  Jevons  in  his  Intro- 
ductory Lecture  at  the  opening  of  the  session  of  1S76-T7.  at  the 
University  of  London,  to  be  found  in  the  "  Fortnightly  Re- 
view "  for  November,  1876.  The  hundredth  anniversary  of 
the  publication  of  the  ••  Wealth  of  Nations  "  was  celebrated  by 
a  dinner  given  in  London  by  the  "  Political  Economy  Club," 
which  was  founded  in  1S21  by  Ricardo.  Malthus,  Tooke,  James 
^liLl,  Grote,  and  others.  3Lr.  John  Stuart  ^lill  was  afterwards 
among  its  most  prominent  members.  At  the  dinner,  Mr.  Glad- 
stone occupied  the  chair :  Mi-.  Lowe,  and  M.  Leon  Say,  the 
French  Minister  of  Finance,  holding  the  seats  next  in  honor. 
]Mr.  Jevons,  in  giving  an  account  of  this  dinner,  in  the  address 
referred  to,  says :  — 

"  I  was  much  struck  with  the  desponding  tone  in  which  Mr. 
Lowe  spoke  of  the  future  of  the  science  I  have  the  honor  to 
teach  in  this  college.  He  seems  to  think  that  the  work  of  the 
science  is  to  a  great  extent  finished.     He  said  :  — 

"  '  I  do  not  feel  myself  very  sanguine  that  there  is  a  verv  large 
field  —  at  least,  according  to  the  present  state  of  mental  and  com- 
mercial knowledge  —  for  Political  Economy  beyond  what  I  have 
mentioned  ;  but  I  think  that  very  much  depends  upon  the  decfree  in 
which  other  sciences  are  developed.  Should  other  sciences  relating 
to  mankind,  which  it  is  the  barbarous  jargon  of  the  day  to  call 
"  Sociology-,"  take  a  spring  and  get  forward  in  any  degree  towards 
the  certainty  attained  by  Political  Economy,  I  do  not  doubt  that 
their  development  would  help  in  the  development  of  this  science  ; 
but,  at  present,  so  far  as  my  own  humble  opinion  sroes,  I  am  not 
very  sanguine  as  to  any  very  large  or  any  very  startlins:  development 
of  Political  Economy.  I  observe  that  the  triumphs  which  have 
been  gained  have  been  rather  in  demolishing  that  which  has  been 
found  to   be  bad  and  erroneous,  than  in  establishing  new  truth  ; 

1  Money  and  the  Mechanism  of  Exchange,  pp.  316-318. 


'692  HISTOEY  OF  MONETAEY  THZOEIES. 

and  ima^ne  that,  before  we  can  attain  new  resmlts,  we  must  be 
famished  from  without  with  new  truths  to  which  our  principles 
may  be  applied.  The  controversies  which  we  now  have  in  Politi- 
cal Economy,  although  they  offer  a  capital  exercise  for  the  logical 
feculties,  are  not  of  the  same  thrilling  importance  as  those  of 
earlier  days :  the  great  work  has  been  done.' 

**  I  am  far  from  denying  that  there  Is  much  to  support,  or  at  any 
rate  to  suggest,  this  view  of  the  matter.  Some  of  the  greatest 
reforms  which  Economists  can  point  out  the  need  of,  have  been 
accomplished,  and  there  certainly  Ls  no  single  work  to  be  done  com- 
parable to  the  establishment  of  free-trade.  But  this  does  not  prevent 
the  existence  of  an  indefinitely  great  sphere  of  useful  work  which 
Economists  could  accomplish,  if  their  science  were  adeqtiate  to 
its  duties.  To  a  certain  extent,  again,  I  agree  with  Mr.  Lowe, 
that  there  is  much  in  the  present  position  of  our  science  to  cause 
despondency.  A  very  general  impression  to  this  effect  seems  to 
exist.  Some  of  the  newspapers  hinted,  in  reference  to  the  centenary 
dinner,  that  the  Political  Economists  had  better  be  celebrating  the 
obsequies  of  their  science  than  its  jubilee.  The  Pall  Jlall  Gazette, 
especially,  thought  that  Mr.  Lowe's  ta.sk  was  to  explain  the  decline, 
not  the  consummation,  of  economical  science.  Perhaps  with  many 
people  the  wish  was  the  father  of  the  thought.  I  am  aware  that 
Political  Ex^onomists  have  alwavs  been  regarded  as  cold-blooded 
beings,  devoid  of  the  ordinary  feelings  of  humanity,  —  little  better, 
in  fact,  than  vivLsectionists.  I  believe  that  the  general  public  would 
be  happier  in  their  minds  for  a  little  time,  if  Political  Economy 
could  be  shown  up  as  imposture,  like  the  greater  part  of  what 
is  called  '  Spiritualism.' 

"  It  mast  Ije  allowed,  too,  that  there  have  been  for  some  years 
back  premonitory-  symptoms  of  disruption  of  the  old  orthodox 
school  of  Economists.  Respect  for  the  names  of  Ricardo  and 
Mill  seems  no  longer  able  to  preserve  unanimity.  J.  S.  Mill  hira- 
pelf,  in  the  later  years  of  his  life,  gave  uf»  one  of  the  doctrines  on 
which  he  had  placed  much  importance  in  his  works.  One  Econo- 
mist after  another  —  Thornton,  Caimes,  Leslie,  ^lacleod,  Longe, 
Hearn,  Musgrave  —  have  protested  against  some  one  or  other  of  the 
articles  of  the  old  Ricardian  creed. 

"At  the  same  time  foreign  Economist*,  such  as  De  Laveleye, 
Courcelle-Seneuil,  Coumot,  Walra-s,  and  others,  have  taken  a 
course  almost  entirely  independent  of  the  predominant  English 
school.  So  far  has  this  discontent  gone,  that  Mr.  Bagehot  has 
been  induced  to  re-examine  the  fundamental  postulates  of  economy 
from  their  very  foundation,  in  his  most  acute  papers  publi-hed  in 
the  '  Fortnightly  Review.'     He  remarks  (p.  216,  Feb.  1,  1876) :  — 

" '  Notwithstanding  these  triumphs,  the  position  of  our  Political 
Economy  Ls  not  altogether  satisfactory.  It  lies  rather  dead  in  the 
public  mind.  Xot  only  it  does  not  excite  the  same  interest  as 
formerly,  but  there  is  not  exactly  the  same  confidence  in  it. 
Younger  men  either  do  not  study  it,  or  do  not  feel  that  it  comes 
home  to  them,  and  that  it  matches  with  their  most  living  ideas. 
.  .  .  They  ask,  often  hardly  knowing  it,  will  this  "  science,"  as  it 


PEESZ^^T  co^^)ITIO^*  of  ECONO^nc  science.        393 

claims  to  be,  harmonize  -srith  what  we  now  know  to  be  science?,  or 
bear  to  be  tried  as  we  now  try  sciences  ?  And  they  are  not  sure 
of  the  answer.' 

"  In  short,  it  comes  to  this  :  that,  one  hundred  years  after  the 
first  publication  of  the  '  "Wealth  of  Nations,'  we  find  the  state  of  the 
science  to  be  almost  chaotic.  There  is  certainly  less  agreement  now 
about  what  Political  Economy  is  than  there  was  thirty  or  fifty 
rears  asro.  Under  these  circumstances,  I  will  now  draw  your 
attention  for  a  short  time  to  the  apparently  rival  sects  which  seem 
likelv  to  arise  from  the  break-up  of  the  old  Ricardian  school. 

"  in  the  first  place,  it  is  impossible  to  ignore  the  fact,  that  there 
has  been  gradually  rising  into  prominence  a  school  of  writers  who 
take  a  very  radical  view  of  the  reforms  required  in  our  science. 
They  call  in  question  the  validity  even  of  the  deductive  method 
on  which  Smith  mainly  relied.  They  hold  that  the  science  must 
be  entirely  recast  in  method  and  materials,  and  that  it  must  take 
the  form  of  an  historical  or  archaeological  science.  At  the  centenary 
dinner,  this  A-iew  of  the  matter  was  boldly  stated  by  one  of  the 
most  distinguished  of  European  Economists,  namely,  M.  de  Lave- 
leye.  His  own  words,  translated  into  English,  will  best  explain 
his  opinions :  — 

" '  It  is  principally  at  this  point  that  there  has  recently  arisen  a 
division  in  the  ranks  of  Economists.  Some,  the  old  school,  whom 
for  want  of  a  better  name  I  will  call  the  "  Orthodox  School,"  believe 
that  every  thins:  regulates  itself  by  the  effect  of  natural  laws.  The 
other  school,  which"  its  adversaries  have  named  the  "  Socialists  of 
the  Chair,''  the  "  Katheder  Socialisten,"  but  which  we  ought  rather 
to  call  the  "  Historical  School,"  or,  as  the  Germans  say,  the  "  Realist 
School"  —  this  school  holds  that  distribution  is  governed  in  part, 
doubtless,  by  free  contract  ;  but  also,  and  still  more,  by  civil  and 
political  institutions,  by  religious  beliefs,  by  moral  sentiments,  by 
custom  and  historical  tradition.  You  see  that  there  opens  itself 
here  an  immense  field  of  studies ;  comprehending  the  relations  of 
Political  Economy  wnth  morals,  justice,  right,  religion,  history,  and 
connecting  it  to  the  ensemble  of  social  science.  That,  in  my 
humble  opinion,  is  the  actual  mission  of  Political  Economy.  This 
is  the  path  pursued  by  nearly  all  German  Economists,  several  of 
whom  have  a  European  reputation,  —  such  as  Rau,  Roscher,  Knies, 
Kasse,  Schaffle,  Schmoller  ;  in  Italy,  by  a  group  of  writers  already 
weU  known.  Minghetti,  Luzzati,  Forti ;  in  France,  by  "Wolowski, 
Lavergne,  Passy,  Coureelle-Seneuil,  Leroy-Beaulieu ;  and  in  Eng- 
land by  authors  whom  it  is  unnecessary  to  name  or  estimate  here, 
because  you  know  them  better  than  I.'  " 

Such  is  the  sad  picture  of  the  eondinon  of  this  great  science. 
"At  the  end  of  one  hundred  years  from  the  first  publiearion 
of  the  '  Wealth  of  Nations,'  we  find,"  says  ^Ir.  Jevons,  ••  the 
state  of  the  science  to  be  almost  chaotic.  There  is  certainly 
less  agreement  now  about  what  Political  Economv  is  than 


394  HISTORY   OF   MONETAEY  THEORIES. 

there  was  thirty  or  fifty  years  ago.     Rival  sects  seem  likely  to 
arise  from  the  break-up  of  the  old  Ricardian  "  (Adam  Smith) 
"  school.  ...  It  must  be  allowed  that  there  have  been  for  some 
years  back  premonitory  symptoms  of  disruption  of   the  old 
orthodox  school  of  Economists.      Respect  for  the  names  of 
Mill  and  Ricardo  seems  no  longer  able  to  preserve  unanimity. 
J.  S.  Mill  himself,  in  the  later  years  of  his  life,  gave  up  one 
of  the  doctrines  on  which  he  placed  much  importance  in  his 
works."     (Would  that  his  life  had   been  longer  preserved !) 
"  One  Economist  after  another  —  Thornton,  Cairnes,  Musgrave, 
and  others  —  have  protested  against  some  one  or  other  of  the 
articles  of  the  old  Ricardian  creed."     These  extracts  are  not 
more  significant  of  the  breaking  up  of  the  old  school  than  is  the 
disgust  universally  felt  for  it.     "  I  am  aware,"  says  Jevons, 
"  that  Political  Economists  have  always  been  regarded  as  cold- 
blooded beings,  devoid  of  the  ordinary  feelings  of  humanity. 
I  believe  that  the  general  public  would  be  happier  in  their 
minds  for  a  little  while  if  Political  Economy  could  be  shown  up 
as  an  imposture,  like  the  greater  part  of  what  is  called  '  Spirit- 
ualism.' "     "  Happier  "  is  a  word  far  too  weak  to  express  the 
satisfaction  which  society  would  feel  if  those  who  have  pestered 
it  for  a  hundred  years  with  their  frivolous  distinctions  and  inane 
talk,  against  which  no  seclusion,  no  bolts  or  bars,  are  proof, 
and  who  weigh  like  a  nightmare  upon  the  race,  were  never,  as 
a  class,  to  be  heard  of  again.     How  great,  therefore,  must  be 
the  satisfaction  of  all  to  find  that  the  centenary  dinner,  given 
in  honor  of  the  great  apostle  of  the  English  system,  became 
the  melancholy   occasion  of   its  last  obsequies  !       One   does 
not  know  at  which  to  be  most  struck,  —  the  sadness  which 
weighed  upon  the  Economists,  or  the  still  sadder  irreverence 
of  the  greater   part   of  those   who   surrounded   the  table,  in 
whose  thoughts  Adam  Smith  had  no  more  place  than  the  "  lost 
tribes."     With  the  statesmen  who  did  the  chief  part  of  the 
talking,  Political  Economy,  as  a  science,  was  held  to  be  pretty 
thovoughlj  functus  officio.     Mr.  Lowe's  melancholy  refrain  has 
already  been  given.      Mr.  Newmarch  insisted  upon  a  larger 
"  negative  development "  of  this  science,  by  which  the  func- 
tions of  the  government  were  to  be  greatly  abridged :  — 

«  On  one  of  the  points,"  he  said, "  mentioned  by  Mr.  Lowe,  with 
respect  to  Political  Economy  in  its  relation  to  the  fixture,  I  am 
sanguine  enough  to  think  that  there  will  be  what  may  be  called  a 


PRESENT   CONDITION   OF  ECONOJVnC   SCIENCE.  395 

large  '  negative  developraent'  of  Political  Economy,  tending  to  pro- 
duce an  important  and  beneficial  effect ;  and  that  is  such  a  devel- 
opment of  Political  Economy  as  will  reduce  the  functions  of 
government  within  a  smaller  and  smaller  compass.  The  full 
development  of  the  principles  of  Adam  Smith  has  heen  in  no 
small  dano-er  for  some  time  past ;  and  one  of  the  great  dangers 
which  now  hangs  over  this  country  is  that  the  wholesome  sponta- 
neous operation  of  human  interests  and  human  desires  seems  to  be 
in  course  of  rapid  supersession  by  the  erection  of  one  government 
department  after  another,  by  the  setting  up  of  one  set  of  insjjectors 
after  another,  and  by  the  whole  time  of  Parliament  being  taken 
up  in  attempting  to  do  for  the  nation  those  very  things  which, 
if  the  teachings  of  the  man  whose  name  we  are  celebrating  to- 
day is  to  bear  any  fruit  at  all,  the  nation  can  do  much  better  for 
itself." 

Mr.  Forster,  on  the  other  hand,  a  member  of  the  government, 
and  who  had  had  some  experience  of  the  weakness  of  our 
race,  would  still  further  invoke  legislative  action  in  social 
econom}" :  — 

"  I  am  strongly  of  the  contrary  opinion,"  he  said,  "  that  we  can- 
not undertake  the  laissez-faire  principle  in  the  present  condition  of 
our  politics,  or  of  parties  in  Parliament,  or  in  the  general  condition 
of  the  countrj'.  I  gather  from  Mr.  Newmarch's  remarks  that  he 
is  an  advocate  of  the  old  laissez-faire  principle.  Well,  if  we  were 
all  Mr.  Newmarches,  if  we  had  nothing  to  deal  with  in  the  country 
but  men  like  ourselves,  we  might  do  this.  But  we  have  to  deal 
with  weak  people  ;  we  have  to  deal  with  people  who  have  them- 
selves to  deal  with  strong  people,  who  are  borne  down,  who  are 
tempted,  who  are  unfortunate  in  their  circumstances  of  life,  and 
who  will  say  to  us,  and  say  to  us  with  great  truth,  '  What  is  your 
use  as  a  Parliament,  if  you  cannot  help  us  in  our  weakness,  and 
against  those  who  are  too  strong  for  us  ?  ' " 

Mr.  Forster  opened  a  pretty  wide  field,  and  disclosed  the  full 
antagonism  which  prevails  in  the  English  schools.  On  the 
subject  of  the  interposition  of  government,  its  members  are  as 
wide  apart  as  the  poles.  A  person  experienced  in  affairs  soon 
learns  that  the  motives  or  principles  which  guide  him  are  no 
criterion  of  those  by  which  others,  and  in  fact  the  masses, 
may  be  swayed  ;  and  he  may  well  feel,  whether  wisely  or  no, 
that  the  innocent  weak  would  have  good  ground  for  complaint, 
unless  protected  from  the  criminal  or  grasping  strong.  The 
"  Wealth  of  Nations  "  is  hardly  the  work  to  be  appealed  to  as 
arbiter  in  questions  such  as  these. 

Mr.  Jevons  was  also  much  struck  with  the  contracted  view 


396  HISTORY   OF  MOXETARY   THEORIES. 

which  seemed  to  be  entertained  by  Mv.  Gladstone  as  to  the 
amount  of  work  remaining  to  be  accomplished  by  the  Econo- 
mists, and  quoted  him  to  the  following  effect :  — 

" '  I  am  bcHind  to  say  that  this  society  has  still  got  its  work  be- 
fore it.  ...  I  do  not  mean  to  say  that  there  is  a  great  deal  remain- 
ing to  be  done  here  in  the  way  of  direct  legislation,  yet  there  is 
something.  It  appears  to  me  at  least  that,  perhaps,  the  question 
of  the  currency  is  one  in  which  we  are  still,  I  think,  in  a  backward 
condition ;  our  legislation  having  been  confined  in  the  main  to 
averting  great  evils,  rather  than  to  establishing  a  system  which, 
besides  being  sound,  would  be  complete  and  logical.  With  that 
exception,  perha23s,  not  much  remains  in  the  province  of  direct 
lesrislation. ' " 


■'is" 


The  following  extracts  from  Mr.  Jevons'  address  will  show 
the  extremities,  both  in  thought  and  style,  to  which  the  Eng- 
lish school  is  reduced  :  — 

"  Passing  now  to  a  second  aspect.  Political  Economy  will  natu- 
rally be  divided  according  as  it  is  abstract  or  concrete.  The  theory 
of  the  science  consists  of  those  general  laws  which  are  so  simple 
in  nature  and  so  deeply  grounded  in  the  constitution  of  man  and 
the  inner  world,  that  they  remain  the  same  throughout  all  those 
ages  which  are  within  our  consideration.  But,  though  the  laws 
are  the  same,  they  may  receive  widely  different  applications  in  the 
concrete.  The  primary  laws  of  motion  are  tlie  same,  whether  they 
be  applied  to  solids,  liquids,  or  gases,  though  the  phenomena  obey- 
ing these  laws  are  apparently  so  different.  Just  as  there  is  a  gen- 
eral science  of  mechanics,  so  we  must  have  a  general  science  or 
theory  of  economy.  Here,  again,  there  is  a  difference  of  opinion. 
There  are  those  who  think  that  dealinsr  as  the  science  does  with 
quantities,  economy  must  necessarily  be  a  mathematic  science  if  it 
is  any  thing  at  all.  There  are  those,  on  the  other  hand,  Avho,  like  the 
late  Professor  Cairnes,  contest,  and  some  who  even  ridicule,  the 
notion  of  representing  truths  relating  to  human  affairs  in  mathe- 
matical symbols.  It  may  be  safely  asserted,  however,  that  if  Eng- 
lish Economists  persist  in  rejecting  the  mathematical  view  of  their 
science,  they  will  fall  behind  their  European  contemporaries.  How 
many  English  students,  or  even  professors,  I  should  like  to  know, 
have  sought  out  the  papers  of  the  late  Dr.  Whewell,  printed  in  the 
Cambridge  Philosophical  Transactions^  in  which  he  gives  his 
view  as  to  the  mode  of  applying  mathematics  to  our  science  ? 
What  English  publisher,  I  may  ask  again,  would  for  a  moment 
entertain  the  idea  of  reprinting  a  series  of  mathematical  works  on 
Political  Economy  ?  Yet  this  is  what  is  being  done  in  Italy  by 
Professor  Gerolamo  Boccardo,  the  very  learned  and  distinguished 
editor  of  the  '  Xuova  Enciclopedia  Italiana.'  Professor  Boccardo 
has  also  prefixed  to  the  series  a  remarkable  treatise  of  his  own  on 


PRESENT   CONDITION   OF  ECONOMIC   SCIENCE.  397 

the  application  of  the  quantitative  method  to  economic  and  social 
science  in  ojeneral.  Tliis  series,  which  forms  the  third  portion  of 
the  well-known  '  Bibliotheca  Econoniista,'  will  be  completed  with 
an  Italian  translation  of  the  works  of  Professor  Leon  Walras,  now 
Rector  of  the  Academy  of  Lausanne,  who  has  in  recent  years 
independently  established  the  fact,  that  the  laws  of  supply  and 
demand,  and  all  the  phenomena  of  value,  may  be  investigated 
algebraically  and  illustrated  geometrically.  From  inquiries  of  this 
sort  the  curious  conclusion  emerges,  that  equilibrium  of  exchange 
of  goods  resembles  in  mathematical  conditions  the  equilibrium  of 
weights  u])on  a  lever  of  the  first  order.  In  the  latter  case,  one 
weight  multiplied  by  its  arm  must  exactly  equal  the  other  weight 
multiplied  by  its  arm.  So,  in  an  act  of  exchange,  the  commodity 
given  multiplied  by  its  degree  of  utility  must  equal  the  quantity  of 
commodity  received  multiplied  by  its  degree  of  utility.  The  theory 
of  economy  proves  to  be,  in  fact,  the  mechanics  of  utility  and  self- 
interest." 

In  spite  of  the  authority  of  Professor  Leon  Walras,  now 
Rector  of  the  Academy  of  Lausanne,  supported  by  that  of 
Mr.  Jevons,  we  must  be  permitted  to  entertain  grave  doubts 
whether  ^  the  laws  of  supply  and  demand,  and  all  the  phe- 
nomena of  value,  may  be  investigated  algebraically,  and  illus- 
trated geometrically."  Neither  does  it  "  emerge  "  to  us,  that, 
admitting  the  fact  that  "  a  commodity  given  multiplied  by  its 
degree  of  utility  must  equal  the  quantity  of  commodity 
received  multiplied  by  its  degree  of  utility,"  all  the  laws  of 
value  are  settled  thereby ;  or  that  "  the  theory  of  Economy 
is  thereby  proved  to  be  the  mechanics  of  utility  and  self- 
interest." 

To  continue  :  — 

"  So  much  for  the  theory  of  Economy,  which  will  naturally  be 
one  science,  remaining  the  same  throughout  its  applications, 
though  it  may  be  broken  up  into  several  parts ;  the  theories  of 
utility,  of  exchange,  of  labor,  of  interest,  &c.,  partly  corresponding 
to  the  old  division  of  the  science  into  the  laws  of  consumption, 
exchange,  distribution,  production,  and  so  forth.  Concrete  Politi- 
cal Economy,  however,  can  hardly  be  called  one  science,  but  already 
consists  of  many  extensive  branches  of  inquiry.  Currency,  bank- 
ing, the  relations  of  labor  and  capital,  those  of  landlord  and  tenant, 
pauperism,  taxation,  and  finance,  are  some  of  the  principal  portions 
of  applied  Political  Economy,  all  involving  the  same  ultimate  laws, 
manifested  in  most  different  circumstances.  In  a  subject  of  such 
appalling  extent  and  complexity  as  currency,  for  instance,  we  de- 
pend upon  the  laws  of  supply  and  demand,  of  consumption  and 
production  of  commodities  as  applied  to  the  precious  metals  or 
other  materials  of  money.     In  the  science  of    banking   and   the 


398  HISTORY  OF  mon:etaey  theories. 

money  market,  we  have  a  very  difficult  application  of  the  same 
laws  to  capital  in  general.  This  separation  of  the  concrete  branches 
of  the  science  is,  however,  sufficiently  obvious  and  recognized,  and 
I  need  not  dwell  further  upon  it.  The  general  conclusion,  then,  to 
which  I  come  is,  that  Political  Economy  must  for  the  future  be 
looked  upon  as  an  aggregate  of  sciences.  A  hundred  years  ago,  it 
was  very  wise  of  Adam  Smith  to  attempt  no  subdivision,  but  to 
expound  his  mathematical  theory  (for  I  hold  that  his  reasoning 
was  really  mathematical  in  nature)  in  conjunction  with  concrete 
applications  and  historical  illustrations.  He  produced  a  work  so 
varied  in  interest,  so  beautiful  in  style,  and  so  full  of  instruction, 
that  it  attracted  many  readers,  and  convinced  those  whom  it 
attracted.  But  Economists  are  no  more  bound  to  go  on  imitating 
Adam  Smith  in  the  accidental  features  of  his  work  than  metaphy- 
sicians are  bound  to  write  in  the  form  of  Platonic  dialogues,  or 
poets  in  the  style  of  the  Shakespearean  drama.  With  the  progress 
of  industry,  how  many  hundreds,  or  even  thousands,  of  trades  have 
sprung  up  since  Smith  wrote !  With  the  progress  of  knowledge, 
how  many  sciences  have  been  created,  and  subdivided  again  and 
again  !  The  science  of  electricity  has  been  almost  entirely  dis- 
covered since  1776 ;  yet  now  it  has  its  abstract  mathematical 
theories,  its  concrete  applications,  and  its  many  branches  ;  treating 
of  frictional  or  static  electricity,  dynamic  electricity  or  galvanism, 
electro-chemistry,  electro-magnetism,  magnetism,  terrestrial  magnet- 
ism, atmospheric  electricity,  and  so  forth.  Within  the  same  cen- 
tury, chemistry,  if  not  born,  has  grown,  and  is  now  so  vast  a  body 
of  facts  and  laws  that  professors  are  appointed  to  teach  different 
parts  of  it.  Yet  the  Political  Economist  is  expected  to  teach  all 
parts  of  his  equally  extensive  and  growing  science,  and  is  lucky  if 
he  escape  having  to  profess  also  the  mental,  metaphysical,  and 
moral  sciences  generally." 

In  striking  contrast,  however,  to  the  above,  and  to  what  was 
said  by  Englishmen  at  the  dinner  referred  to,  was  the  brief 
account  given  by  M.  de  Laveleye,  of  the  new  Continental  or 
"  Realist  School ;  "  which  holds  "  production  and  distribution 
to  be  governed  in  part  by  free  contract,  but  also,  and  still 
more,  by  civil  and  political  institutions,  by  religious  beliefs,  by 
moral  sentiments,  by  customs  and  traditions,  —  that  morals, 
justice,  right,  religion,  history,  altogether  go  to  make  up  the 
tout  ensemble  of  social  or  political  science."  After  naming 
those  esteemed  worthy  to  be  enrolled  in  the  new  school, 
having  for  its  basis  the  whole  nature  of  man,  and  whose 
method  is  investigation,  not  assumption,  he,  with  matchless 
politeness  and  irony,  left  it  to  the  Englishmen  present  to  add 
their  own  illustrious  names  to  the  list.  Echo  was  silent ;  and 
will  remain  silent  till  Adam  Smith,  with  his  deductive  method 


BONAlVrY  PRICE.  399 

and  the  school  founded  upon  it,  all  ignorant  of  any  higher 
force  in  human  development  than  the  selfish  instincts  of  the 
race,  are  thrown  into  the  common  receptacle  of  the  incongruous 
and  useless  rubbish  of  the  past. 

There  is,  however,  a  lower  depth  than  even  Mr.  Jevons 
sounded,  and  that  was  touched  by  Mr.  Bonamy  Price,  Profes- 
sor of  Political  Economy  in  the  University  of  Oxford,  as  will 
be  seen  by  the  following  extracts  from  lectures  delivered  by 
him  in  that  institution,  and  embodied  in  a  work  entitled  the 
"  Principles  of  Currency." 

"  Political  Economy,  in  respect  of  the  range  of  its  subject-matter," 
says  Mr.  Price,  "has  no  superior,  if  indeed  it  has  an  equal,  among 
the  sciences.  It  treats  of  wealth,  of  its  production  and  of  its  distri- 
bution, and  the  larger  part  of  human  life  is  spent  in  the  exercise  of 
these  two  functions.  Political  Economy  is  often  spoken  of  as  a 
modern  science  ;  but  it  has  existed  in  all  ages,  and  amongst  all  civil- 
ized nations.  Men  at  all  times  have  occupied  themselves  with  the 
creation  of  wealth  according  to  certain  rules  and  ideas ;  for  no 
laborious  employment  can  be  extensively  carried  on  without  the 
existence  of  some  notions  as  to  the  right  way  of  working,  and  the 
most  fitting  methods  for  attaining  the  end  desired.  It  is  a  mistake, 
though  a  very  common  one,  to  suppose  that  practical  men,  as  they 
are  called,  are  destitute  of  theory.  The  exact  reverse  of  this  state- 
ment is  true.  Practical  men  swarm  Avith  theories  ;  none  more  so. 
They  abound  in  views,  in  ideas,  in  rules,  which  they  endow  with  the 
pompous  authority  of  experience ;  and  when  new  principles  are 
proposed,  none  so  quick  as  practical  men  to  overwhelm  the  inno- 
vator with  an  array  of  the  wnsdom  which  is  to  be  found  in  preva- 
lent practice.  I  know  of  no  place  which  is  so  entirely  under  the 
dominion  of  loudly  corrected  theories  as  the  city.  In  some  depart- 
ments of  Political  Economy,  the  doctrines  of  merchants  and  bank- 
ers have  subdued  the  whole  land,  and  almost  put  a  stop  to  all 
independent  thought  which  should  presume  to  contradict  the  estab- 
lished theories  of  men  of  business.  Adam  Smith's  illustrious  work 
is  almost  wholly  devoted  to  the  demolition  of  the  huge  superstruct- 
ure of  doctrine  wdiich  traders  had  I'eared  up  on  their  practice.  The 
difference  which  separates  the  man  of  science  from  the  man  of 
practice  does  not  consist  in  the  presence  of  general  views  and  ideas 
on  one  side,  and  their  absence  on  the  other.  Both  have  views  and 
ideas.  The  distinction  lies  in  the  method  by  which  these  views 
have  been  reached ;  in  the  breadth  and  completeness  of  the  inves- 
tigation pursued ;  in  the  rigorous  questioning  of  facts,  and  the 
careful  dio-estion  of  the  instruction  thev  contain :  in  the  co-ordina- 
tion  and  the  loscical  cohesion  of  the  truths  established. 

"  No  science  has  suffered  so  severely  at  the  hands  of  practical 
and  empirical  men  as  Political  Economy.     They  have  at  all  times 


400  HISTORY  OF  MONETAEY  THEORIES. 

propounded  and  acted  on  doctrines  of  the  most  elaborate  kind. 
The  more  directly  engaged  in  business  was  the  speaker,  the  more 
complicated,  the  more  artificial,  the  more  mysterious,  have  been  the 
rules  he  laid  down  for  the  attainment  of  wealth.  Monopolies  were 
proclaimed  to  be  the  infallible  means  for  creating  good  and  trust- 
worthy quality  in  manufacture.  .  .  .  Then,  again,  when  the  dis- 
covery of  the  New  World  enlarged  geography  with  colonies  of  a 
novel  kind,  the  practical  man  speedily  stepped  forward  with  his 
theory,  and  taught  the  statesman  that  the  secret  of  the  new  and 
boundless  wealth  engendered  by  colonies  lay  in  the  exclusive  ap- 
propriation of  their  trade  by  the  mother  country.  His  teaching 
was  adopted  by  every  civilized  country,  and  became  the  recognized 
policy  of  all  Europe.  Great  wars  were  waged  in  the  name  of  the 
practical  man's  ideas  :  his  views  were  supreme  over  all  colonial 
relations.  .  .  .  The  practical  man's  ascendency  thus  rose  ever 
higher  and  higher,  till  it  reached  its  culminating  point  in  the 
famed  mercantile  theory,  —  the  crowning  embodiment  of  the  wis- 
dom which  pi-actical  prudence  and  experience  had  inspired.  The 
precious  metals  were  held  up  as  the  one  supreme  object  of  indus- 
trial ambition.  .  .  . 

"  I  am  consti'ained  to  acknowledge  that  Political  Economy  finds 
itself,  even  at  this  time  of  day,  in  a  most  unsatisfactory  position. 
Two  causes,  it  seems  to  me,  have  mainly  brought  about  this  I'esult. 
The  first  and  most  influential  is  the  singularly  undefined  character 
of  the  boundary  line  Avhich  encloses  the  subject-matter  of  Political 
Economy.  The  example  set  by  the  illustrious  expounder  of  Polit- 
ical Economy  has  not  been  faithfully  observed  by  his  successors. 
In  the  '  Wealth  of  Nations,'  the  frontier  line  which  separates  Polit- 
ical Economy  from  cognate  sciences  is  rarely  transgressed.  Adam 
Smith  seldom  runs  away  from  his  true  subject,  or  mixes  it  up  with 
foreign  elements.  His  followers  have  too  often  written  in  a  less 
philosophical  spirit.  Political  Economy  is  infested  with  an  inces- 
sant tendency  to  commingle  with  general  politics.  The  confusion 
was  natural :  for  wealth  and  finance  form  a  large  part  of  the  busi- 
ness which  occupies  every  government ;  and  a  philosophy  which 
augmented  the  riches  of  a  people,  stimulated  their  industry,  poured 
expanding  streams  into  the  national  exchequer,  and  spread  con- 
tentment Avith  prosperity  over  the  country,  could  not  fail  to  look 
exceedingly  like  the  science  of  good  government.  And  so  it  is,  in 
a  sense  ;  but  still  only  within  the  limits  of  its  appropriate  province. 
But  to  identify  Political  Economy  with  statesmanship,  with  the 
science  of  government,  —  to  suppose  that  a  great  Political  Economist 
is  ex  vi  fermini  a  gi-eat  statesman,  —  is  as  absurd  as  to  identify  the 
science  of  jurisprudence,  or  the  building  of  ironclads,  with  politics, 
or  to  imagine  that  a  great  general  is  infallibly  a  scientific  states- 
man. This  confusion  has  shown  itself  in  other  branches  of  knowl- 
edge which  are  largely  made  use  of  by  governments  ;  but  nowhere 
has  it  prevailed  so  ^videly  or  worked  so  much  mischief  as  in  Polit- 
ical Economy.  Its  name  is  unfortunate,  and  only  too  well  calcu- 
lated to  precipitate  its  writers  into  this  delusion.  They  never 
seem  quite  able  to  escape  the  impression  that  Political  Economy  is 


BONAMT  PEICE.  401 

a  branch  of  politics.  .  .  .  It  may  be  very  important ;  it  may  furnish 
more  occupation  to  the  statesman  than  any  other  province  of 
human  life ;  it  may  have  to  be  consulted  more  frequently,  and  its 
suggestions  may  be  very  closely  connected  with  the  happiness  of 
the  whole  people,  —  nevertheless,  it  is  the  knowledge  of  a  single 
department  only.  They  may  be  overridden,  modified,  or  rejected 
at  the  dictation  of  a  yet  more  universal  science,  by  the  order  of  a 
still  wider  and  higher  knowledge.  The  function  of  the  Economist 
is  solely  to  report,  on  matters  within  his  cognizance,  to  the  states- 
man ;  but  it  is  the  statesman,  and  the  statesman  alone,  whose  pre- 
rogative it  is  to  judge  of  their  application.  .  .  . 

"  So  much  for  the  first  of  the  two  great  difficulties  which  weigh 
on  the  pursuit  of  Political  Economy,  —  the  one,  namely,  which  is 
derived  from  its  own  nature,  and  the  subject-matter  which  it 
explores.  I  now  come  to  the  second,  —  the  one  which  assails  it 
from  without,  and  which,  as  far  as  I  am  aware.  Political  Economy 
alone,  of  all  the  sciences,  is  compelled  to  endure.  It  never  seems 
to  make  a  final  and  permanent  lodgement  of  any  of  its  truths  in  the 
public  mind.  They  float  on  a  tide  which  often  carries  the  vessel 
backward  as  fast  as  it  jirogresses  forward.  The  tendency  to  back- 
elide  seems  to  be  incessant  and  irresistible,  —  not  from  any  fault  of 
its  own,  or  from  want  of  ability  and  demonstrating  power  in  its  teach- 
ers, but  from  the  strength  of  the  adverse  forces  which  every  one  ot 
its  conclusions  is  ceaselessly  obliged  to  encounter.  A  centrifugal 
force  is  ever  acting  on  some  large  section  of  society,  —  sometimes, 
even,  on  a  whole  population,  —  which  makes  it  forget  all  that  it  has 
learned,  and  draws  it  back  into  the  darkness  of  ignorance.  In 
other  sciences,  a  truth  once  won  is  won  for  ever.  Xo  one  chal- 
lenges the  principle,  or  acts  in  defiance  of  its  law :  no  one  slides 
back  into  the  belief  that  the  sun  revolves  round  the  earth  ;  no  one 
contradicts  the  truths  once  established  by  the  chemist  or  hydi-aulist. 
The  renson  of  this  difference  of  fortune  does  not  consist  in  the 
certainly  attached  to  the  subject-matter  of  the  one,  and  the  inher- 
ent uncertainty  of  the  other.  Some  of  the  positions  reached  by 
Political  Economy  attain  the  quality  of  demonstration  ;  and  yet 
they  are  denied  or  ignored  as  readily  as  if  they  w.ere  the  hypothe- 
sis of  an  empiric.  They  are  not  argued  against  and  refuted  ;  no 
second  trial  is  summoned  to  retest  their  value  :  they  are  simply 
passed  over ;  and  then  the  error  which  they  were  supposed  to  have 
dispelled  resumes  its  possession  of  the  public  mind,  just  as  if  it 
were  the  infallible  suggestion  of  instinct.  It  seems  like  lost  labor 
to  waste  instruction  on  those  who  listen  and  are  convinced,  and 
then,  under  some  indescribable  impulse,  rebel  against  the  light. 
And  what  is  this  impulse?  How  is  a  phenomenon  apparently  so 
discreditable  to  the  human  understanding  to  be  explained  ?  How 
comes  Political  Economy  to  have  been  born  under  so  unlucky  a 
star  as  to  be  doomed  to  teach  and  persuade,  only  to  be  repudiated? 
The  explanation  is  to  be  found  in  the  ceaseless  action  of  selfish- 
ness, in  the  never-dying  force  of  class  and  personal  interests,  in 
the  steady  and  constant  effort  to  promote  private  gains  at  the  cost 
of  the  whole  community.     The  foremost  lessons  of  Political  Econ- 

26 


402  HISTORY   OF   MONETARY   THEORIES. 

omy  are  directed  against  naiTOw  visions  of  private  advantage ;  and 
they  strive  to  show  how  the  welfare  of  each  man  is  most  effectually 
achieved  by  securing  the  welfare  of  all.  But  it  seems  otherwise 
to  the  natural  mind.  The  immediate  gain  lies  before  it,  can  be 
seen  and  handled  ;  and  the  law  which  demands  its  sacrifice,  in  order 
to  arrive  at  a  wider  and  more  prolific  result,  appears  to  contradict 
the  senses,  and  to  bring  ruin  and  not  benefit  in  its  train.  .  .  . 

"  And,  now,  what  is  the  moral  to  be  drawn  from  these  ever-recur- 
rin<y  sins  against  light  and  knowledge  ?  That  Political  Econ- 
omy is  in  possession  of  no  truth  ?  that  the  experience  of  life, 
and  the  surer  intelligence  of  the  whole  people,  refute  the  illu- 
sions with  which  a  few  subtle  thinkers  bewilder  themselves  in 
the  closet?  that  practice  is  wiser  than  theory?  Nothing  of  the 
kind.  Such  practice  contains  no  refutation  of  theory ;  it  puts  for- 
ward no  argument ;  it  makes  no  appeals  to  reason  ;  it  pretends  to  no 
better  thought-out  opinions.  We  can  trace  here  only  the  action  of 
disturbing  influences,  —  the  power  of  selfishness  in  combination 
with  the  most  limited  narrowness  of  vision.  The  moral  to  be  drawn 
is  the  importance  of  thoroughly  imbuing  the  mind  with  accurate 
principles,  before  prejudice  has  had  time  to  build  itself  up,  whilst 
the  mind  is  impressible  by  reason,  and  truths  firmly  implanted  retain 
their  hold  for  life.  The  moment  you  see  nations  and  legislatures 
carried  away  by  the  strength  of  the  tide  into  narrow  empiricism, 
determine  resolutely  to  be  a  good  Political  Economist.  .  .  .  Here, 
then,  is  the  mercantile  theory.  Let  us  now  take  up  the  newspapers 
of  to-day.  Read  the  city  articles  of  every  one  of  them.  Look  at 
the  cast  of  thought,  at  the  style  of  literature,  at  the  principles  pro- 
ceeded upon,  at  the  whole  spirit  of  the  language.  What  is  thought 
most  deserving^  of  record  ?  The  sums  of  sold  taken  to  the  Bank  of 
England,  or  taken  away  from  it ;  the  amount  of  bullion  ;  the  ves- 
sels laden  with  gold  on  their  passage  to  England  from  California 
and  Australia ;  the  state  of  the  exchanges.  The  beloved  phrase  of 
the  mercantile  theory,  '  favorable  exchanges,'  is  dwelt  upon  with 
satisfaction  ;  unfavorable  exchanges,  and  the  departure  of  gold  to 
foreign  countries,  are  bemoaned  witla  anxiety  as  a  loss ;  prognosti- 
cations are  made  of  a  lansfuishins:  or  flourishing:  trade,  according  to 
the  influx  or  reflux  of  bullion  ;  and  weekly  returns  are  proclaimed 
of  ingots  buried  out  of  sight  in  the  cellars  of  the  Bank.  The 
doctrine  that  gold  is  wealth  —  the  doctrine  which  Mr.  Mill  paints 
as  an  absurdity  so  palpable  that  the  present  age"  regards  it  as  in- 
credible, as  a  crude  fancy  of  childhood  —  breathes  in  every  line  of 
the  city  articles  of  all  our  daily  newspapers.  .  .  .  What  is  this,  I 
ask,  but  the  mercantile  theory,  pure  and  fresh,  as  you  heard  Mr. 
Mill  describe  it  ?  What  is  it  but  the  resurrection  of  the  Practical 
Man,  —  the  reassertion  of  himself,  of  his  experience,  his  appeal  to 
outward  form,  to  what  may  be  touched  and  handled  ?  The  world 
fondly  imagined  that  he  was  vanquished  and  gone ;  that  Adam 
Smith  had  finally  disposed  of  him ;  that  boys  and  students  had 
learned  to  pity  him,  and  to  pride  themselves  on  having  been  born 
after  the  great  Scotch  genius  :  never  was  there  a  greater  mistake. 
It  takes  many  Adam  Smiths  in  Political  Economy  to  kill  off  for 


BONAMY  PRICE.  403 

ever  genuine  mercantile  superstitions.  The  great  authority,  the 
man  of  millions,  who  is  supposed  to  understand  the  theory  of  busi- 
ness precisely  because  he  has  made  millions,  revives  in  every  age. 
TJyxo  avidso,  non  deficit  alter,  aureus.  The  mercantile  theory  may 
be  consigned  by  philosophers  to  the  limbo  of  nursery  toys ;  but  it 
lives  onall  the  same,  is  master  of  the  mind  of  the  city,  is  supreme 
over  city  articles,  and  regulates  the  barometer  of  commercial 
weather,  and,  above  all,  is  held  to  know  the  great  secret  of  trade, 
and  to  be  able  to  show  men  the  way  to  get  rich.  .  .  . 

"  The  mercantile  theory  lives,  and  one  of  two  inferences  from 
this  fact  must  be.acccpted.  Either  it  is  the  true  theory  of  trade, 
and  Adam  Smith  is  not  the  great  benefactor  of  mankind  which  he 
is  supposed  to  have  been ;  or  else,  in  the  department  of  science 
which  has  for  its  object  the  wealth  of  the  community,  error  pos- 
sesses a  vitality  which  is  more  than  a  match  for  the  keenest  logic 
and  the  strongest  common  sense. 

"  The  mercantile  theory  has  given  birth  to  a  child  to  which  the 
whole  litei'ature  of  the  world  affords  no  parallel,  —  the  doctrine  of 
currency  as  exhibited  in  the  nineteenth  century.  I  fear,  almost,  to 
utter  its  name ;  and  yet  it  will  form  the  subject  of  the  following 
lectures.  The  very  sound  of  the  word  '  currency '  makes  every 
man  turn  his  back  or  shut  his  ears.  His  immediate  instinct  is  to 
fly  fi-om  a  subject  with  which  he  associates  every  kind  of  jargon 
and  unendurable  phraseology.  Yet  it  was  the  very  repulsiveness 
of  currency  which  induced  me  first  to  embark  upon  its  study.  It 
seemed  to  me  a  marvellous  phenomenon,  well  worth  investigation, 
that  there  should  be  at  this  period  of  the  world's  history  an  arti- 
cle of  the  most  uniA'crsnl  use  in  daily  life  which  seemed  to  defy 
explanation  in  plain  and  intelligible  language.  Other  subjects  of  the 
most  recondite  abstruseness  had  been  mastered.  Hieroglyphics  had 
been  read,  mysterious  inscriptions  cleared  up,  the  profoundest 
depths  of  physics  sounded,  and  the  most  subtle  problems  in  mathe- 
matics conquered.  Few,  indeed,  might  be  the  hearers  that  these 
successful  investigators  could  attract ;  but  those  hearers  listened 
with  delight,  and  could  feel  that  they  had  made  an  acquisition  of 
real  knowledge.  What,  then,  Avas  this  so-called  science,  from  which 
all  men  seemed  to  turn  away  in  disgust,  —  even  those  whose  lives 
were  spent  in  handling  the  objects  of  which  it  treats  ?  How  was 
so  astonishing  an  event  to  be  explained  ?  What  causes  had  ren- 
dered currency  the  reproach  of  our  age  ?  What  was  there  in  sov- 
ereigns and  bank-notes  so  inscrutable  as  to  baffle  the  sharpest 
intellect,  and  to  be  incapable  of  clear  and  simple  exposition? 
The  cause  of  this  strange  spectacle  presently  became  evident.  The 
philosophic  spirit  had  been  absent ;  the  right  method  of  investiga- 
tion had  been,  I  will  not  say  neglected,  but  absolutely  despised ; 
the  method  of  Bacon,  to  which  modern  science  owes  its  strength,  — 
patient  and  accurate  analysis,  —  had  been  scorned,  as  if  fit  only  for 
physical  subjects,  but  too  mechanical  for  such  subtle  substances  as  the 
instrument  of  finance.  A  priori  assumptions  prevail  on  every  side, 
in  the  discussion  of  currency.  Every  one  starts  with  some  arbi- 
trary hypothesis.     Can  we  wonder,  after  that,  to  find  univei'sal  con- 


404  HISTORY   OF   MONETARY   THEORIES. 

fusion  and  obscuiity?  Currency  has  been  the  jumble  that  it  is, 
authority  contradicts  authority,  no  first  principles  are  recognized  as 
the  common  basis  fi'om  which  reasoning  may  take  its  origin,  and, 
when  some  practical  measure  has  been  discussed,  the  cry  of  salva- 
tion for  commerce  is  met  by  the  counter  shriek  of  ruin,  —  simply  be- 
cause no  one  will  condescend  to  analyze  facts,  and  to  explore  their 
meaning.  The  world  has  chosen  to  refer  to  great  bankers  and 
merchants,  —  to  men  who  have  conducted  vast  businesses,  and  have 
realized  gigantic  fortunes.  These  men,  the  world  said,  have  spent 
their  lives  in  dealing  with  money.  Must  they  not  know  the 
nature  of  money  and  its  laws?  Must  we  not  take  our  theory  at 
their  hands  ?  And  so  mankind  did  take  the  theory  of  money  from 
commercial  authority,  and  the  result  has  been  currency  in  the  state 
in  which  we  now  find  it.^ 

"  We  have  learned  what  coin  is  ;  we  have  become  acquainted 
with  a  metallic  currency  and  its  nature  :  but  what  are  checks  and 
bills,  which  make  up  the  banking  trade  ?  Many  would  say  they 
are  papers  which  represent  money ;  but  I  cannot  accept  the  word 
'represent'  in  currency,  for  I  can  never  understand  its  meaning. 
It  has  no  definite  meaning  for  me  ;  nor,  as  far  as  I  can  perceive,  for 
any  one  else.  Anyhow,  checks  and  bills  are  not  money.  They 
may,  in  their  respective  spheres,  do  the  same  work  as  money ;  but 
in  this  place,  where  we  are  speaking  of  a  purely  metallic  currency, 
they  are  not  money.  What  are  they,  then  ?  Orders  to  pay  money, 
which  can  be  legally  enforced ;  title-deeds  to  money  which  lead 
directly  to  the  obtaining  of  money.  They  are  all  warrants  or  evi- 
dences of  debt.  ...  A  check  on  a  banker  implies  a  debt  due  by 
the  banker  as  its  basis  :  a  bill  is  an  admission  of  the  acceptor  that 
he  owes  money,  and  an  undertaking  to  pay  it  on  a  particular  day. 
Here,  then,  we  have  the  things  a  banker  deals  in,  —  the  resources  of 
which  he  disposes.  Bankers  deal  in  debts,  and  a  Bank  is  an  insti- 
tution for  the  transfer  of  debt.  Bankers  deal  in  orders  to  pay 
money  in  discharge  of  debts.  ...  So  far  a  banker's  business  is 
identical  with  that  of  a  clerk  sent  around  by  a  great  shop  to  collect 
its  bills.  ...  So  much  for  a  banker's  receipts  :  he  does  not  obtain 
them  in  money ;  they  come  to  him  as  checks  and  bills.  These  are 
his  resources.  .  .  .  The  all-important  question  is,  how  these  checks 
and  bills  are  bom  into  the  world,  what  is  it  that  makes  a  banker  have 
few  or  many  of  them  at  different  times.  People  are  ever  saying 
that  Banks  have  much  or  little  money  ;  that  money  is  abundant 
or  scarce.  This  is  very  erroneous  and  very  misleading  language. 
Money,  cash,  sovereigns,  and  bank-notes  vary  very  little  indeed. 
.  .  .  The  language  should  be,  —  bills  and  checks,  or,  if  an  abstract 
word  is  preferred,  deposits  are  scarce  or  abundant :  many  checks 
have  arrived  at  the  Bank  to-day  :  it  will  lend  freely,  and  charge  a  low 
rate  for  its  loans.'  How,  then,  do  these  checks  and  bills  come  into 
existence '?  Omitting  accommodation  bills,  which  are  foreign  to 
this  discussion,  they  denote  goods  bought  and  paid  for,  either  by  a 
transfer  of  debt  or  by  a  promise  to  pay  later.     Every  man  who 

^  Principles  of  Currency,  Inaugural  Lecture. 


BOKAJVIY   PRICE.  405 

gives  a  check  has  previoiisly  sold  something,  and  charged  his 
banker  to  get  the  payment  for  him.  ...  If  the  customer  buys 
more  than  he  sells,  if  he  makes  losses  in  business,  or  lives  beyond 
his  income,  the  balance  now  falls  the  other  way.  The  banker's 
power  to  lend  to  others,  his  resources,  his  means,  depend  entirely 
on  his  customer  buying  less  than  he  sold.  The  banker  finds  that 
more  checks  are  drawn  upon  him  than  are  sent  to  him  to  collect 
payment  for,  his  means  are  reduced ;  he  is  less  able  to  lend : 
he  makes  difficulties  about  loans  ;  the  rate  of  discount  rises,  and 
the  city,  which  has  never  investigated  the  matter,  screams  in 
astonishment  or  indignation.  Money,  coin  and  bank-notes  have 
no  part  in  this  matter,  except  as  small  change.  All  the  buying 
and  selling,  all  the  borrowing  and  lending,  takes  place  by  exchang- 
ing debts  r  actual  payment  is  so  rare  as  not  to  be  worth  consider- 
ing. '  Give  me  your  oil-cake,'  says  the  farmer,  '  and  I  will  tell  my 
banker  to  pay  you.'  Does  he  make  an  actual  payment  ?  No  :  the 
cake-merchant  gives  the  check  to  his  own  banker,  and  forthwith 
proceeds  to  buy  linseed,  and  tells  the  Russian  in  turn,  '  I  will  tell 
my  banker  to  pay  you.'     And  so  it  goes  on  in  every  trade.^ 

«  The  check  has  furnished  us  with  a  very  natural  introduction  to 
the  discussion  of  paper  money.  .  .  .  The  bill  and  the  check  in  time 
generated  the  bank-note.  .  .  .  And  now  let  us  watch  the  process 
by  which  the  bank-notes  issue  forth  into  circulation.  It  is  full  of  in- 
struction on  the  fundamental  points  of  a  paper  currency.  We  all 
know  how  an  ordinary  check  makes  its  appearance  in  the  world: 
goods  are  bought  a  check  is  signed  for  the  cash,  and  so  it  com- 
mences its  short-lived  existence.  The  birth  of  the  bank-note  takes 
place  in  a  different  manner.  It  is  signed  and  made  ready  at  the 
Bank;  but  how  does  it  come  forth?  Through  payments,  few 
though  they  be,  which  the  Bank  makes  in  cash.  It  is  the  office  of 
the  banker  to  lend ;  and  he  lends  the  more  freely  in  proportion  as 
his  borrowers  carry  away  the  loans  in  notes.  I  am  speaking  of  the 
first  establishment  of  its  notes  in  public  circulation  at  its  origin. 
Observe  the  fact  well :  it  is  the  root  of  most  of  the  strange  delusions 
afloat  in  the  world  about  paper  currency.  It  indissolubly  associates 
in  the  commercial  mind  the  issue  of  notes  with  perpetual  ability  to 
lend.  '  The  banker,'  cries  the  world,  '  most  of  all,  the  Bank  of  Eng- 
land, in  the  hour  of  panic,  can  issue  notes  which  will  do  the  work 
of  money,  and  he  can  lend  all  the  more  to  traders  accordingly.' 
And  then  this  fact  is  insisted  on,  that,  by  issuing  notes  the  banker 
acquires  additional  means  for  lending.  This  fact  is  perfectly  true  ; 
but  there  is  an  enormous  fallacy  lurking  beneath  it.  .  .  . 

"  And  now  we  reach  the  most  important  question  of  all  —  in 
what  numbers  will  these  bank-notes  circulate  ?  It  is  the  crucial 
question  wherewith  to  test  the  soundness  of  every  theory  of  cur- 
rency. It  is  a  question  which  every  merchant,  every  banker,  every 
chainber  of  commerce,  every  member  of  Parliament  who  speaks  on 
currency,  ought  to  push  home  to  his  mind,  and  not  be  content  till 
he  has  attained  to  a  clear,  precise,  and  intelligible  answer.     It  is  the 

1  Principles  of  Currency,  Lee.  iii. :  "  Wliat  is  a  Bank  ?  " 


406  HISTORY   OF  MOKETAEY  THEORIES. 

centre  of  every  theory  of  currency,  whether  metallic  or  of  paper. 
Every  doctrine  which  is  mistaken  on  this  central  principle  is 
worthless  as  an  interpreter  of  the  science  of  currency.  Mr.  Tooke 
discerned  the  true  answer :  Mr.  Mill,  with  some  little  wavering,  and 
a  few  others,  have  seen  the  light ;  but  the  general  literature  on 
money  matters  throughout  the  world  profoundly  ignores  the  fact. 
The  answer  is  the  same  with  that  which  has  already  been  given  to 
the  parallel  question  respecting  sovereigns.  So  many  bank-notes 
as  the  public  wants  and  can  use  will  circulate,  and  no  more.  .  .  . 
This  is  the  truth  of  truths  in  currency.  ...  An  expanded  or  in- 
flated circulation  of  bank-notes  is  an  absurdity,  nothing  better  than 
pure  nonsense.  It  would  be  just  as  sensible  to  speak  of  an  ex- 
panded or  inflated  circulation  of  hats."  ^ 

It  is  hardly  necessary  to  comment  upon  all  this.  Indeed, 
an  apology  is  due  for  encumbering  this  work  by  copying  so 
largely.  It  may  do  some  good,  however,  to  show  the  inco- 
herent buffoonery  taught  in  the  name  of  Political  Economy 
in  one  of  the  first  universities  in  Christendom.  Where  are 
her  purists,  that  they  tolerate  within  her  sacred  precincts 
a  fustian  rhetoric  to  be  matched  only  by  that  of  Pistol? 
which  proclaims  "  merchants  and  bankers  to  have  subdued  the 
whole  land,  and  to  have  almost  put  a  stop  to  independent 
thought ;  that  the  more  directly  one  is  engaged  in  business,  the 
more  complicated,  the  more  artificial,  the  more  mysterious,  are 
the  rules  laid  down  by  him  for  the  attainment  of  wealth."  The 
present  unsatisfactory  position  of  the  science  is  charged  to 
"  the  ceaseless  action  of  selfishness,  the  never-dpng  force  of 
class  and  personal  interests,  to  promote  private  gain  at  the 
cost  of  the  whole  community.  Here,"  he  continues,  "  is  the 
Mercantile  Theory.  Read  the  city  articles  of  every  one  of 
the  newspapers.  Look  at  the  cast  of  thought,  at  the  style  of 
literature,  at  the  principles  proceeded  upon,  at  the  whole 
spirit  of  the  language.  What  is  thought  most  worthy  or  de- 
serving of  record  ?  The  vast  sums  of  gold  taken  to  the  Bank  of 
England,  or  taken  away  from  it ;  the  state  of  the  exchanges, 
and  the  weekly  returns  of  ingots  buried  out  of  sight  in  the 
cellars  of  the  Bank.  The  doctrine  that  gold  is  wealth  —  the 
doctrine  which  Mr.  Mill  paints  as  an  absurdity  so  palpable 
that  the  present  age  regards  it  as  incredible,  as  a  crude  fancy 
of  childhood  —  breathes  in  every  line  of  the  city  articles  of 
all  our  daily  newspapers.     What  is  this,  I  ask,  but  the  Mer- 

1  Principles  of  Currency,  Lee.  iv. :  "  Paper  Currency." 


BONAJklY  PEICE.  407 

cantile  Theory,  pure  and  fresli,  as  you  heard  Mr.  Mill  describe 
it  ?  What  is  it  but  the  resurrection  of  the  Practical  Man,  —  the 
reassertion  of  himself,  of  his  experience,  his  appeal  to  out- 
ward form,  to  what  may  be  touched  and  handled.  The  world 
fondly  imagined  he  was  vanquished  and  gone  ;  that  Adam 
Smith  had  finally  disposed  of  him  ;  that  boys  and  students 
had  learned  to  pity  him,  and  pride  themselves  on  having  been 
born  after  the  great  Scotch  genius  :  never  was  there  a  greater 
mistake.  The  Mercantile  Theory  lives,  and  one  of  two  infer- 
ences from  this  fact  must  be  accepted :  either  it  is  the  true 
theory  of  trade,  and  Adam  Smith  is  not  the  great  bene- 
.  factor  of  mankind  which  he  is  supposed  to  have  been  ;  or  else 
in  the  department  of  science  which  has  for  its  object  the 
wealth  of  the  community,  error  possesses  a  vitality  which  is 
more  than  a  match  for  the  keenest  logic  and  the  strongest  com- 
mon sense." 

A  reader  of  the  Economists  cannot  fail  to  be  struck  with 
the  hostility,  not  to  say  hatred,  which  all  of  them  display 
toward  merchants.  Adam  Smith,  when  he  called  them  "  sneak- 
ing underlings,"  struck  the  key-note  for  all  his  followers. 
What  is  the  reason  of  this  hatred,  with  a  sharper  tooth 
even  than  that  of  the  odium  theologicum  ?  —  the  practice  of 
treating  gold  as  wealth,  and  the  highest  form  of  wealth,  in 
the  very  face  of  the  teachings  of  the  Economists  that  it  is 
not  wealth  ;  or  that  it  is  the  lowest  form  of  wealth.  It  was  a 
reflection  not  to  be  tolerated.  Smith  did  his  best  to  sustain 
his  theory  by  sneers  and  flings  at  those  who  grew  rich  by  its 
violation.  He  declared  them  to  be  a  mean  and  selfish  race, 
the  abettors  of  the  worst  forms  of  monopoly,  and  the  dis- 
turbers of  the  peace  of  the  world.  Price,  in  his  grotesque 
way,  attempts  to  paint  them  in  still  blacker  colors.  He  admits 
that  if  the  merchant,  if  the  universal  instinct  of  the  race,  is  to 
be  trusted,  the  teachings  of  Adam  Smith,  so  far  as  they  relate 
to  money,  are  shams ;  that  one  of  the  two  must  go  to  the  wall. 
The  only  refuge  of  the  Economists  is  in  crying  that  the  sci- 
ence has  been  overborne  by  the  selfishness  of  men  of  affairs. 
They  cannot  deny  that  these  grow  rich  by  pursuing  methods 
precisely  the  opposite  to  those  which  they  lay  down.  The  man 
of  millions  vaunts  his  methods  ;  and,  in  reply  to  criticism  upon 
them,  shakes  his  money-bags.  The  Economists  fiercely  reply 
that  truth  is  sacrificed  to  mammon  ;  but  if  it  be  the  office  of 


408  HISTORY   OF  MONETARY  THEORIES. 

Political  Economy  to  teach,  the  method  of  wealth,  why  has 
not  the  man  of  millions  the  true  method ;  and  what  need  of 
going  bej^ond  his  rules  ?  As  for  the  selfishness  of  the  race, 
we  fear  that  Political  Economists  have  no  prescription  for 
its  cure.^ 

In  a  history  of  monetary  theories,  it  will  be  necessary  to 
refer  only  very  briefly  to  American  writers,  as  they  simply 
echo,  without  one  spark  of  originality  or  independence,  but 
with  an  extravagance  perhaps  characteristic  of  the  nation, 
what  they  have  found  in  the  books  written  on  the  other  side 

1  It  is  hardly  necessary  to  take  into  account  Continental  writers  upon  tlie  sub- 
ject of  money.  None  of  them  have  treated,  to  any  considerable  extent,  of  sym- 
bolic currencies.  When  these  are  referred  to,  Adam  Smith  seems  to  have  been 
implicitly  followed.  The  most  distinguished  of  them  is  Jean-Baptiste  Say,  whose 
first  work,  entitled  "  A  Treatise  on  Political  Economy,"  &c.,  was  published  in 
1803.  It  was  for  a  long  time  a  text-book  in  the  schools  of  this  country.  He 
held  with  Smith  and  English  Economists,  that  the  value  of  money  depended,  or 
might  depend,  upon  the  necessity  that  existed  for  a  medium  of  exchange. 
"  The  intense  demand  for  money,"  he  says,  "has  sometimes  been  sufficient  to 
make  paper  employed  as  money  equal  in  value  to  gold  of  the  same  denomination ; 
of  which  the  money  of  Great  Britain  is  a  present  example.  It  must  not  be 
imagined  that  the  paper  money  of  that  country  derives  its  value  from  the 
promise  of  payment  in  specie  which  it  purports  to  convey.  That  promise  has 
been  held  out  ever  since  the  suspension  of  cash  payment  by  the  Bank  in  1797, 
without  any  attempt  at  performance,  which  many  people  consider  impossible. 
.  .  .  Yet  the  paper,  though  depreciated,  is  invested  with  value  far  exceeding 
that  of  its  flimsy  material.  Whence,  then,  is  that  value  derived  ?  From  the 
urgent  want,  in  a  very  advanced  stage  of  society  and  industry,  of  some  agent  or 
medium  of  exchange. ^  .  .  .  Paper  money  is  thus  left  in  the  exclusive  posses- 
sion of  the  business  of  circulation ;  and  the  absolute  necessity  of  some  agent  of 
transfer  in  every  civilized  community  will  then  operate  to  maintain  its  value. 
So  urgent  is  this  necessity  that  the  paper  money  of  England,  consisting  of  the 
notes  of  the  Bank,  has  been  kept  at  par  with  specie  simply  by  the  limitation  of 
the  issue  to  the  demands  of  circulation."  ^  In  other  words,  so  intense  at  times 
has  been  the  demand  for  food,  that  people  have  been  forced  to  eat  their  knives 
and  forks  to  appease  hunger  and  support  life !  Chevalier  hardly  touches  upon 
the  subject  of  paper-money.  He  confines  himself  almost  exclusively  to  metallic 
money,  —  its  sources  of  supply,  distribution,  &c.  His  treatise  upon  the  probable 
fall  of  gold,  which  was  translated  by  Mr.  Cobden,  seems  to  be  very  inadequate, 
in  not  sufficiently  taking  into  account,  not  only  the  increased  amounts  nec- 
essary to  be  held  for  the  support  of  symbolic  currencies,  but  also  the  vastly 
increased  power  of  consumption  due  to  the  increased  wealth  of  the  leading 
European  nations  and  the  United  States.  Wolowski,  whose  work  is  of  more 
recent  date,  appears  to  have  been  wholly  ignorant  of  the  nature  and  object  of 
paper  money,  as  he  quotes  approvingly  Mr.  Amasa  Walker's  dictum,  that  paper 
ehould  symbolize  nothing  but  gold. 

1  Say's  Political  Economy,  Book  i.  Chap.  xxl. 

2  Ibid.,  Chap,  xxii. 


FRANCIS   BOWEN.  409 

of  the  water.  Among  the  most  conspicuous  of  them  is  Mr. 
Francis  Bowen,  lately  Professor  of  Political  Economy  in  Har- 
vard University,  who,  pending  his  professorship,  published  a 
voluminous  work  facetiously  entitled  "American  Political 
Economy,"  which  was  long  used  as  a  text-book  in  that  institu- 
tion. It  is  a  feeble  and  garrulous  restatement  of  Adam 
Smith,  Stewart,  Ricardo,  Tooke,  ^IcCulloch,  and  Mill,  to  whose 
absurdities  and  errors  an  emphasis  is  given  by  no  means  to  be 
found  in  the  originals. 

"I  say,  then,  that  money  is  merely  a  contrivance  for  diminishing 
the  friction  of  exchange ;  and,  though  safe  and  convenient,  it  is 
also  a  very  costly  contrivance  for  this  end.  ...  It  is  a  portion  of 
the  wealth  of  the  country,  it  is  true  ;  but  it  is  a  portion  of  our  un- 
productive wealth,  not  our  capital.  We  are  the  poorer  by  the  loss 
of  profit  or  interest  on  all  of  it  which  we  are  obliged  to  keep  on 
hand.  Money  (paradoxical  as  tlie  assertion  may  seem)  yields 
neither  profit  nor  interest.  It  is  only  the  goods  or  commodities 
that  are  transferred  by  means  of  money  which  yield  profit ;  and 
this  profit  or  interest,  as  we  have  seen,  depends  on  the  mutations 
or  changes  of  form  that  they  undergo.  The  very  reason  which 
Locke  adduces  for  the  high  estimate  put  upon  money  in  comparison 
with  other  objects  of  wealth,  —  namely,  its  durability,  or  the  fact 
that  it  cannot  be  consumed,  —  is  the  cause  why  it  is  not  productive. 
The  specie  which  a  merchant  or  a  banker  holds  in  store,  to  pro- 
vide against  daily  calls  or  sudden  emergencies,  is  the  only  unpro- 
ductive portion  of  his  capital :  he  is  subject  to  a  loss  of  interest  on 
the  whole  amount  thus  retained.  It  has  been  already  proved  that 
it  is  only  through  the  constant  transformation  of  capital,  through 
its  repeated  consumption  and  reproduction,  that  it  is  made  to  yield 
a  profit.  And  even  as  an  article  of  unproductive  wealth,  it  may 
be  said  of  money  that  it  gratifies  no  taste,  and  in  its  capacity  as 
money,  apart  from  its  character  as  a  portion  of  wealth,  it  yields  no 
enjoyment.  The  coin  which  a  man  keeps  in  his  pocket  does  not, 
like  his  shoes  or  his  hat,  contribute  to  liis  comfort  :  it  is  a  conven- 
ience to  him  only  as  it  sup])lies  immediate  means  for  making  small 
purchases  or  satisfying  small  demands."  ^ 

We  have  already  sufficiently  dealt  with  all  such  statements 
as  these.  It  is  enough  to  reply  here,  that  coin  has  a  great 
many  functions  beside  "  diminishing  the  friction  of  exchange." 
It  cannot  be  called  unproductive  so  long  as  it  can  be  loaned  at 
interest,  and  is  absolutely  indispensable  in  the  process  of 
distribution,  without  which  there  can  be  no  capital  worthy 
the  name.     It  would  be  just  as  proper  to  say  that  a  wagon  or 

1  American  Political  Economy,  pp.  281,  282. 


410  HISTORY  OF  MONETARY   THEORIES. 

railroad  car  was  unproductive,  for  the  reason  that  it  did  not 
produce  the  merchandise  transported  by  it. 

"  In  every  exchange,"  he  continues,  "  tbe  two  vahies  which  are 
exchanged, are  supposed  to  be  equaL  Every  exchange  is  a  barter 
of  a  quantity  of  merchandise  for  a  certain  sum  of  money  which 
is  its  equivalent.  But  it  does  not  follow  that  there  must  be  in  the 
community  as  much  money  as  there  is  merchandise  ;  for,  as  the 
money  is  not  consumed  by  effecting  this  exchange,  it  is  ready 
immediately  to  effect  another  purchase.  The  same  piece  of  money 
may  be  exchanged  successively  for  any  number  of  articles  of  mer- 
chandise of  the  same  value ;  or,  in  other  words,  any  sum  of  money 
can  purchase  successively  a  quantity  of  merchandise  worth  an  infi- 
nitely larger  sum. 

"  The  circulation  of  money  and  of  merchandise  bears  some  rela- 
tion to  the  momentum  spoken  of  in  physical  science,  which  is 
composed  of  the  velocity  multiplied  by  the  mass  ;  the  momenta 
are  equal,  though  the  velocity  should  be  increased  tenfold,  provided 
that  the  mass  is  but  one  tenth  part  as  great.  So,  also,  the  momentum. 
of  wealth  is  its  value  multiplied  by  the  rapidity  of  its  circulation. 
As  money  circulates  far  more  rapidly  than  merchandise,  it  is  evident 
that  (the  number  of  exchanges  on  both  sides  being  equal)  there 
must  necessarily  be  less  value  in  the  money  than  in  the  merchan- 
dise, and  as  much  less  as  the  circulation  of  the  money  is  more 
rapid  than  that  of  the  merchandise.  If  the  value  of  the  mer- 
chandise which  changes  hands  in  a  country  in  the  course  of  a  year 
amounts  to  a  thousand  millions,  and  the  circulation  of  the  money 
is  ten  times  as  quick  as  that  of  the  merchandise,  a  hundred  mil- 
lions of  money  will  effect  all  the  exchanges.  Let  the  quickness  of 
the  money  circulation  be  doubled,  and  fifty  millions  will  suffice. 

"  Mr.  J.  S.  Mill  has  stated  this  point  very  clearly  :  '  If  we  assume 
the  quantity  of  goods  in  sale,  and  the  number  of  times  those 
goods  are  resold,  to  be  fixed  quantities,  the  value  of  money  will 
depend  upon  its  quantity,  together  with  the  average  number  of 
times  that  each  piece  changes  hands  in  the  process.  The  whole  of 
the  goods  sold  (counting  each  resale  of  the  same  goods  as  so  much 
added  to  the  goods)  have  been  exchanged  for  the  whole  of  the 
money,  multiplied  by  the  number  of  purchases  made  on  the  aver- 
age by  each  piece.  Consequently,  the  amount  of  goods  and  of 
transactions  being  the  same,  the  value  of  money  is  inversely  as  ^ts 
quantity  multiplied  by  what  is  called  the  rapidity  of  circulation. 
And  the  quantity  of  money  in  circulation  is  equal  to  the  money 
value  of  all  the  goods  sold  (including  all  the  resales  as  additional 
goods)  divided  by  the  number  w^hich  expresses  the  rapidity  of  cir- 
culation.' 

"  Stating  the  matter  algebraically,  we  have 

g  s^^rnr  ; 
where  y:=:  quantity  of  goods  on  sale ; 

s  =  number  of  times  the  goods  are  resold ; 
m  z=  quantity  of  money  in  circulation  ; 
r= number  of  purchases  effected  by  each  piece  of  money. 


FRAXCIS   BO  WEN.  411 

"  Of  course,  any  three  of  these  quantities  being  given,  the  fourth 
can  be  deduced  from  them.     Thus, — 

q  s 
m  =  —  : 
r 

which  is  the  principle  just  enunciated.  It  is  also  evident,  that  the 
value  of  money  will  be  inversely  as  its  quantity  ;  for,  if  we  suppose 
the  quantity  of  money  to  be  doubled,  we  still  have 

^  5  =  2  m  r  / 
whence, 

2  wz=  —  ; 
r 

that  is,  2  m  is  worth  only  the  same  value  which  was  formerly  rep- 
resented by  m."  ^ 

The  value  of  money,  says  Mr.  Bowen,  is  in  ratio  to  its  momen- 
tum ;  that  is,  "  to  its  quantity  multiplied  by  what  is  called  the 
rapidity  of  circulation."  The  degree  of  one  measures  that  of 
the  other.  "  If  the  value  of  the  merchandise  which  changes 
hands  in  a  country  in  the  course  of  a  year  amounts  to 
$1,000,000,000,  and  the  circulation  of  money  is  ten  times  as 
quick  as  that  of  the  merchandise,  $100,000,000  will  effect  all 
the  exchanges.  Let  the  quickness  of  money  be  doubled,  and 
$50,000,000  will  suffice."  So,  also,  he  says,  "  the  momentum 
of  wealth  is  its  value  multiplied  by  the  rapidity  of  its  cir- 
culation." Momentum  and  effective  value  are  identical  terms. 
All  kinds  of  merchandise,  wealth  being  a  generic  term,  obey 
the  same  law.  Whatever  value  can  be  predicated  of  one  kind, 
due  to  the  rapidity  of  its  circulation,  can  be  of  all  other  kinds. 
Assuming  the  correctness  of  his  proposition,  the  great  prob- 
lem for  society  is  to  determine  the  degree  of  momentum  that 
can  be  secured  for  its  merchandise,  as  its  wealth  will  be  in- 
creased in  like  ratio.  As  j\Ir.  Bowen  has  applied  his  illustra- 
tion to  only  one  kind  of  merchandise,  money,  we  will  extend 
it  to  others :  thus,  — 

g  s-=m  r. 

The  alcrebraical  formula  is  the  same  in  its  characters ;  but 
for  the  present  purpose  g  stands  for  goose  instead  of  goods. 
Now,  "  the  value  of  the  goose  is  inversely  as  its  quantity  mul- 
tiplied by  the  rapidity  of  its  circulation."  Assuming  the  for- 
mula given  to  express  the  ordinary  rapidity  of  circulation,  or, 
what  is  equivalent,  the  momentum,  and  consequently,  value  of 

1  American  Political  Economy,  pp.  306-308. 


412  HISTORY   OF  MONETARY  TELEORIES. 

the  goose ;  then,  if  its  momentum,'  or  value,  be  doubled,  the 
formula  has  only  to  be  altered ;  thus  :  — 

^  s  ^  2  m  r, 

or 

9  ^ 

The  goose  has  now  a  value  twice  greater  than  it  had  before. 

Of  course,  any  three  of  these  quantities  being  given,  the 
fourth  can  be  deduced  from  them  ;  thus :  — 

9  ^ 
r 

which  is  the  principle  just  enunciated.  As  the  value  of  the 
goose  will  be  inversely  as  its  quantity,  if  this  quantity  be 
reduced  one-half  (the  demand  the  same),  we  stiU  have 

9^ 


whence, 


2-mr, 


2m  =  — ; 


that  is,  2  m  will  have  only  the  value  that  was  formerly  pos- 
sessed by  m.  If  the  crop  of  geese  should  be  short,  and  it 
should  be  desirable  to  increase  their  momentum,  or  effective 
value,  say  tenfold,  all  that  would  have  to  be  done  would  be  to 
increase  their  rapidity  of  circulation  to  be  expressed  by  the  fol- 
lowing change  in  Mr.  Bowen's  formula ;  thus :  — 

9  * 

10  =  ^'*' 

or 

10  m  r  =  ^s. 

When  the  last  degree  of  momentum  was  secured,  a  wing  or  a 
leg  of  the  goose  would  have  a  value  equal  to  that  of  the  whole 
bird.  Society  will  be  the  gainer  in  an  equal  degree,  by  being 
able  to  devote  to  other  purposes  the  land  formerly  dedicated  to 
goose-culture.  Admitting  the  conclusiveness  of  his  demon- 
stration, it  must  be  applicable  to  all  kinds  of  merchandise ;  for, 
as  has  already  been  shown,  money,  after  it  has  been  spent,  is  as 
functus  officio  to  its  late  owner  as  is  the  goose  to  its  owner  after 
it  is  eaten.  If  it  be  objected  that  the  money  is  still  in  exist- 
ence, and  the  goose  is  not,  it  may  be  replied :  that  the  goose 
has  indeed  been  eaten,  but  productively,  to  appear  in  new 
geese,  or  in  other  kinds  of  merchandise  ;  so  that  whoever  uses 


FKANCIS   BOWEN.  413 

the  money  tlie  second  time  is  still  confronted  by  a  new 
goose  or  its  equivalent.  If  the  goose  or  its  equivalent  do  not 
reappear,  then  the  money  does  not.  Each  responds,  and  with 
equal  alacrity,  to  the  call  of  the  other. 

"  It  is  possible,"  he  continues,  "  to  displace  a  portion,  or  even  the 
larger  part,  of  the  specie  currency,  and  make  paper  currency,  or 
Some  other  substitute,  take  its  place;  and  the  specie  thus  dis- 
jilaced  will  either  go  abroad  or  be  melted  up.  But  the  total  amount 
of  the  currency  will  remain  just  as  before  :  the  value  of  the  paper 
and  the  precious  metals,  taken  together,  will  be  just  what  the  spe- 
cie alone  would  be  if  paper  were  not  used.^ 

"  We  thus  gain  a  more  correct  idea  of  the  comparatively  limited 
functions  of  money ;  which  common  persons  are  led  grossly  to 
exaggei'ate,  merely  because,  at  any  one  time  and  place,  it  is  a  com- 
mon measure  of  value,  a  universal  denomination  of  account, 

"  All  wealth,  all  commodities,  are  estimated  in  dollars,  francs, 
pounds  sterling,  and  the  like;  and  it  is  by  the  aid  of  such  esti- 
mates that  all  exchanges  are  made.  Thus,  the  idea  of  money  aids 
us,  when  the  reality  is  seldom  employed.  As  pounds  sterling  were 
a  universal  denomination  of  account  for  a  long  period  during 
which  there  was  no  such  thing  as  a  pound  sterling  in  existence,  so 
the  idea  or  abstract  conception  of  numerical  values  expressed  in 
coin  would  be  a  convenient,  even  an  essential,  implement  or  con- 
trivance in  mercantile  transactions,  though  all  exchanges  should  be 
made  by  direct  barter  of  one  commodity  for  another.  Without 
such  a  contrivance,  the  merchant  could  not  keep  his  books  of 
record  intelligibly,  or  preserve  his  accounts  with  individuals  in  Ins 
large  and  complicated  business.  Money  is  even  now  only  a  hypo- 
thetical or  abstract  medium  of  exchange  in  all  the  larger  transac- 
tions of  commerce.  I  almost  anticipate  the  time,  in  the  progress  of 
invention  and  the  discovery  of  new  expedients  and  facilities  in 
commerce,  when  it  will  become  so  universally ;  when,  at  any  rate, 
so  costly  and  useless  a  realization  of  the  idea  as  gold  and  silver  coin 
will  be  entirely  done  away.  Only  practical  difficulties,  or  what 
may  be  called  difficulties  of  detail,  even  now  obstruct  this  desirable 
consummation.^ " 

Mr.  Bowen  is  certainly  mistaken.  Society  has  not  as  yet 
advanced  so  far  in  the  substitution  of  ideas  for  things  as  he 
supposes.  Money  is  still,  as  many  find  to  their  cost,  far  more 
than  a  mere  scale  of  valuation.  The  holders  of  property, 
when  they  sell  it,  still  persist  in  demanding  something  more 
than  "hypothetical  or  abstract  media  of  exchange."  They 
may  be  very  uncivilized  and  selfish  to  demand  a  quid  pro  quo 

1  American  Political  Economy,  p.  311. 

2  Ibid.,  p.  334. 


414  HISTORY  OF  MONETABY  THEORIES. 

in  all  transactions,  and  the  laws  which  uphold  them  very  bar- 
barous ;  but  these  laws,  nevertheless,  have  maintained  their 
force  since  laws  existed.  The  longing  of  the  Economists  for  a 
world  in  which  ideas  stand  for  things  carries  them  too  far. 
Mr.  Bowen,  before  he  vacated  the  chair  of  Political  Economy, 
should  have  reconciled  this  conflict  between  the  ideal  and 
actual.  He  would  then  have  ranked  among  the  great  benefac- 
tors of  his  race.  But  if  wishing  were  having,  if  the  good 
things  of  life  could  be  had  without  desert,  no  one  would  do 
any  thing  deserving  of  them  ;  so  that,  after  all,  it  may  be  well 
to  let  money  remain  the  expensive  thing  it  is. 

"  We  are  now  prepared  to  explain  the  great  difference  between 
convertible  bank  currency  and  inconvertible  bills,  or  paper  money, 
properl}'^  so  called,  —  that  the  latter  is  liable  to  issue  in  excess,  and 
consequent  depreciation,  while  the  former  is  not.  .  .  .  Those  who 
fear  an  excessive  issue  of  convertible  bank-bills  might  as  well  ap])re- 
hend  that  Lake  Erie  would  overflow  its  banks,  and  flood  all  the 
surrounding  country,  because  it  is  constantly  receiving  the  surplus 
waters  of  the  three  upper  lakes  and  of  innumerable  tributary 
streams.  They  forget  that  the  average  level  of  the  lake  depends, 
not  upon  the  quantity  of  water  flowing  into  the  lake,  but  upon  the 
quantity  that  flows  out  of  it  over  Niagara  Falls ;  and  that  no  cause 
could  affect  the  level,  except  by  raising  or  lowering  the  bar  at  the 
opening  of  Niagara  River,  which  regulates  the  rate  of  the  efllux.* 

"  It  follows  from  this  whole  review  of  the  subject  of  paper  money, 
which  I  have  intentionally  based,  as  far  as  possible,  upon  historical 
facts  rather  than  abstract  reasoning,  that  the*  depreciation  of  it  is 
attributable  solely  to  excess  in  its  issue.  If  this  excess  could  be 
prevented,  that  is,  if  the  amount  of  paper  ciu-rency  could  be  kept 
precisely  equal  to  what  the  amount  of  metallic  currency  would  be 
in  case  there  were  no  paper  in  circulation,  then  there  would  be  no 
depreciation  of  the  j^aper;  nay,  the  paper  might  even  command  a 
premium  over  the  coin,  if  the  aggregate  value  of  it  were  made  less 
than  what  the  coin  would  amount  to,  and  if  it  were  also  possible  to 
prevent  the  importation  of  specie.  Money  acquires  the  power  of 
exei'cising  its  functions,  not  from  any  intrinsic  quality  that  it  pos- 
sesses, but  solely  from  convention.  To  adopt  Mr.  Stuart  Mill's 
language,  '  Convention  is  quite  sufiicient  to  confer  the  power ; 
since  nothing  more  is  needful  to  make  a  person  accept  any  thing 
as  money,  and  even  at  any  arbitrary  value,  than  the  persuasion 
that  it  will  be  taken  from  him  on  the  same  terms  by  others.'  The 
value  of  paper  money,  not  depending  at  all  upon  its  cost  of  pro- 
duction, is  regulated  solely  by  its  quantity.  A  certain  determin- 
able sura  of  money  is  needed  in  every  nation  to  effect  its  current 
exchanges,  and  to  maintain  prices  at  an  equilibrium  with  the  aver- 

1  American  Political  Economy,  pp.  382-384. 


FRANCIS   BOWEN.  415 

ao-e  prices  of  coramodlties  throughout  the  commercial  world.  Coin 
beino-  banished,  if  the  issue  of  paper  money  is  less  than  this  sum, 
the  paper  will  be  at  a  premium ;  if  greater,  it  will  be  at  a  discount."  ^ 

In  the  preceding  paragraph,  Mr.  Bowen  only  repeats  what 
the  English  Economists  have  labored  a  century  to  prove.  If 
they  have  been  answered,  he  has  been ;  if  not,  he  cannot  be. 

Were  Mr.  Bowen  the  only  one  to  be  affected  by  his  opinions, 
they  would  be  of  very  little  consequence ;  but  they  become  of 
the  greatest  importance  when  taught  to  young  men  about  to 
enter  the  world  of  affairs,  especially  when  they  relate  to  a 
subject  which  concerns,  more  deeply  almost  than  any  other, 
the  welfare  of  society.  What  would  be  thought  of  a  pro- 
fessorship in  a  university  that  should  still  seek  to  establish 
the  wonderful  properties  of  the  philosopher's  stone?  The 
attempt  would  not  be  a  whit  more  absurd  than  his  teach- 
ings upon  the  subject  of  money.  The  thing  chiefly  to 
be  regretted  is,  that  there  does  not  seem  to  be  any  way  in 
wMch  to  rid  the  universities  and  the  world  of  such  nonsense. 
So  far  as  money  is  concerned,  all  are  Alchemists,  all  are  be- 
lievers in  the  philosopher's  stone,  all  are  intent  upon  its  real- 
ization. The  first  step  in  the  way  of  reform  should  be  to 
abolish  the  "  professorship  of  Political  Economy,"  not  only  in 
this,  but  in  all  institutions  in  which  it  is  now  pretended  to  be 
taught ;  and  either  abandon  instruction  in  it  altogether,  or  put 
its  duties  in  commission.  In  the  latter  case,  whatever  was 
taught  would  at  least  have  the  merit  of  being  as  broad  as  the 
course  of  instruction  would  allow.^ 

1  American  Political  Economy,  pp.  388,  389. 

2  The  following  propositions,  taken  from  the  last  catalogue  of  Haryard  Uni- 
versity, make  up  a  part  of  the  course  upon  whicli  its  students  are  called  to  exer- 
cise their  wits  :  — 

"  Compare  the  generally  received  principle,  that  paper  money  tends  to  expel 
coin  from  circulation,  with  the  following  : 

"  All  commodities  tend  to  move  toward  those  places  at  which  they  are  the 
most  utilized.  Notes  and  checks  increase  the  utility  of  the  precious  metals; 
and  therefore  it  is  that  money  tends  to  flow  toward  those  places  at  which  notes 
and  checks  are  most  in  use,  passing  in  America  from  the  Southern  and  Western 
States  toward  the  Northern  and  Eastern,  and  from  America  toward  England." 

Some  kinds  of  paper  money  tend  to  expel  coin  from  circulation,  and  some  to 
increase  the  amount  in  circulation.  If  any  question  were  to  be  asked,  it  should 
have  been  the  manner  in  which  the  two  differ.  How  do  notes  and  checks  in- 
crease tlie  utility  of  the  precious  metals  ?  In  the  same  way  that  they  increase 
the  utility  of  a  barrel  of  pork.     Whether  they  do  increase  its  utility,  and,  if  so, 


416  HISTORY   OF  MONETARY  THEORIES. 

Another  American  writer  upon  the  subject  of  money  is  Mr. 
William  G.  Sumner,  Professor  of  Political  Economy  in  Yale 
College,  who  has  recently  published  a  work  entitled  "  History 
of  American  Currency."  The  only  part  of  it  calling  for 
notice  is  that  which  discusses  the  report  of  the  Bullion  Com- 
mittee, which,  Mr.  Sumner  claims,  solved  the  whole  subject 
of  money :  — 

"  The  question  involved  "  (referring  to  the  report),  "  was,  there- 
fore, this  :  Is  an  adverse  balance  of  trade  the  explanation  of  an 
outflow  of  gold  ?  or :  Is  a  favorable  balance  of  trade  the  force  to 
which  we  must  look  to  bring  an  influx  of  gold?  There  is  no 
question  in  finance  which  now  demands  our  study  so  imperatively 
as  this  one.  The  false  notions  of  the  balance  of  trade  infest 
almost  every  discussion  of  our  present  circumstances  "which  one 
reads  or  hears.  It  is  assumed  that  the  movement  of  the  precious 
metals  fi'om  country  to  country  is  caused  by  the  balance  of  trade 
one  way  or  the  other  ;  and,  as  the  movement  of  the  metals  is  a  phe- 
nomenon of  the  first  im2:)ortance  in  any  question  of  resumption,  the 
reasoning  which  starts  Avith  this  doctrine  is  all  fallacious.  The  bal- 
ance of  trade  was  exploded  by  Quesnay  and  his  followers  a  century 
ago,  and  was  gibbeted  in  the  Bullion  Report,  but  it  stalks  the  money 
market  and  the  national  treasury  to-day,  an  uneasy  ghost,  which  it 
seems  impossible  to  lay. 

"  It  is  a  vexatious  task,  and  one  which  always  makes  a  scien- 
tific man   feel  ridiculous,  to  set  vigorously  to  work  to  demolish 

in  what  way,  would  be  a  proposition  upon  which  the  youths  might  exercise  their 
wits  to  some  profit.  It  is  not  true  that  money  tends  to  flow  from  the  Southern 
and  Western  to  the  Eastern  States,  and  from  them  to  England,  in  greater  quan- 
tity than  in  opposite  directions.  If  money  (commodities)  united  to  flow  to  those 
places  at  which  it  is  the  most  utilized,  it  is  from  the  cities  and  the  richer  part  of 
the  country  to  the  poorer,  —  from  tiie  Northern  and  Eastern  to  the  Southern  and 
Western  States.  Ten  per  cent  is  not  an  extravagant  rate  to  be  paid  on  loans  of 
money  either  in  Kansas  or  Texas,  from  the  profitable  manner  in  wliich  it  can  be 
used  in  them.  It  consequently  flows  toward  them  from  its  greater  utility  there 
than  elsewhere.  There  are  ten  dollars  to-day  in  Kansas  where  there  was  one 
ten  years  ago;  and  this  money  came  almost  wholly  from  the  Eastern  States,  in 
which  the  ratio  of  its  increase  within  the  period  named  has  not  been  one-twen- 
tieth of  that  in  Kansas.  That  money  did  tend  to  flow  from  the  Southern 
and  Western  States  toward  tiie  Northern  and  Eastern,  and  from  these  toward 
England,  would,  if  true,  be  a  very  comforting  proposition  for  the  latter  countries. 
Even  the  professor  who  propounded  it  seems  to  entertain  doubts  whether  it  ever 
reaches  them.  He  alleges  a  tendency,  without  daring  to  affirm  a  result.  This  ten- 
dency, it  is  to  be  feared,  is,  after  all,  only  a  piece  of  sickly  sentimentalism,  not 
having  force  enough  to  surmount  the  Aileghanies  in  one  case,  or  pass  the  Grand 
Banks  in  the  otiier. 

Here  is  anotlier  puzzle  put  by  the  professor  of  Political  Economy  in  that  insti- 
tution to  the  Harvard  wits  :  "  Mention  the  three  classes  into  which  commodi- 
ties are  divided  in  relation  to  their  value.  In  which  class  do  you  place  gold  and 
silver  1 " 


WILLIAM   G.   SUMNER.  4l7 

an  old  error  which  no  well-informed  man  any  longer  holds  ;  but  in 
our  pi-esent  situation,  and  under  our  political  system,  popular 
errors  are  of  the  utmost  importance,  and  no  pains  should  be  s[)ared 
in  patiently  exposing  them.  The  fallacy  here  is  in  the  word 
*  balance.'  If  it  means  equilibrium,  it  may  be  used  correctly  to 
denote  the  equality  of  exports  and  imports  ;  but  then  it  regulates 
itself,  and  no  power  can  control  it.  If  it  means  remai7ider,  and 
suggests  analogies  of  book-keeping,  it  is  a  mere  myth  to  which  no 
fact  corresponds,  and  is  to  be  entirely  rejected.  .  .  . 

"  The  report  of  this  committee  is  perhaps  the  most  important 
doctrine  in  financial  literature.  Its  doctrines  have  been  tested 
both  ways,  —  by  disbelief  and  by  belief,  by  experiment  of  their 
opposites  and  by  experiment  of  themselves.  They  are  no  longer 
disputable.  They  are  not  matter  of  opinion  or  theory,  but  of  demon- 
stration. They  are  ratified  or  established  as  the  basis  of  finance. 
They  may  be  denied,  as  the  roundness  of  the  earth  was  denied 
five  years  ago,  and  as  Newton's  theory  of  the  solar  system  was 
denied  imtil  within  twenty-five  years ;  but  they  have  passed  the 
stage  where  the  scientific  financier  is  bound  to  discuss  them. 

"  The  doctrines  of  this  report  may  be  summed  up  thus  :  — 

"  1.  The  value  of  an  inconvertible  currency  depends  on  its  amount 
relatively  to  the  needs  of  the  country  for  circulating  medium  (only 
to  a  very  subordinate  degree  on  the  security  on  which  it  is  based 
or  the  credit  of  the  issuer). 

"  2.  If  gold  is  at  a  premium  in  paper,  the  paper  is  redundant  and 
depreciated.     The  premium  measures  the  depreciation.^ 

"  On  a  system  of  even  nominal  convertibility,  the  motives  of 
speculation  and  of  price  fluctuations  lie  outside  of  the  currency 
in  industrial  and  commercial  circumstances.  Speculation,  in  the 
widest  and  best  sense,  controls  the  amount  of  the  currency.  On 
an  inconvertible  system,  the  amount  of  the  currency  controls 
speculation.  If  it  is  not  redundant,  its  effect  is  slight ;  if  it  is  very 
excessive,  it  '  floats '  every  thing,  and  'becomes  the  controlling  con- 
sideration. No  one  believes  that  an  inconvertible  currency  sus- 
pends the  operation  of  any  of  the  economic  laws  which  govern 
prices ;  but,  if  it  is  redundant,  it  decides  whether  the  fluctuations 
in  price  of  a  unit  of  a  given  commodity  shall  be  above  and  below 
$1,  or  above  and  below  §2.  Every  contraction  or  expansion  alters 
this  general  level.^ 

"  Of  the  three  questions  involved  in  the  report,  as  stated  above : 
—  Is  the  paper  depreciated  ?  why  are  the  exchanges  adverse  ?  how 
ought  the  Bank  to  regulate  its  issues?  —  the  first  and  third  have 
no  great  importance  for  us.  No  one  denies  that  our  paper  is  de- 
preciated, unless  it  be  those  who  think  that  we  have  '  grown  up  '  to 
the  currency,  though  that  notion  seems  to  have  gone  out  of 
fashion  again.  The  question  of  regulating  an  inconvertible  Bank 
paper  is  not  our  question,  because  our  paper  is  fixed  in  amount. 
But  the  second  question  of  the  Bullion  Committee  has  great  im- 

1  History  of  American  Currency,  pp.  245-249. 

2  Ibid.,  pp.  253,  254. 

27 


418  HISTORY   OF    MONETARY    THEORIES. 

portance.  It  is  the  one  in  regard  to  which  doctrines  opposed  to 
those  of  the  BulUon  Report  are  most  frequently  affirmed  and  most 
profoundly  believed  amongst  us,  and  there  is  no  hope  of  any  exit 
from  our  circumstances  until  we  get  to  understand  the  laws 
which  govern  the  distribution  of  the  precious  metals,  and  those 
laws  of  currency  which  are  connected  therewith.  It  will  be  remem- 
bered, as  stated  above,  that  the  question  about  the  exchanges  is 
really  this  question  :  If  the  exchanges  are  adverse  to  such  a  degree 
as  to  produce  a  serious  and  prolonged  outflow  of  the  precious 
metals,  where  must  we  look  for  the  cause  ?  Is  it  due  to  the  bal- 
ance of  payments,  or  to  some  deterioration  of  the  currency  ?  Or,  to 
put  the  same  question  in  another  form  :  If  we  desire  to  produce  an 
influx  of  gold,  to  what  force  must  we  look  to  cause  it  ?  Must  we 
look  to  the  '  balance  of  trade,'  or  can  we  do  any  thing  in  the  matter 
save  sit  still  and  wait  for  the  balance  of  trade  to  turn  ?  Can  we 
bring  it  about  by  correcting  some  error  in  the  currency  ? 

"  The  answer  to  these  questions  given  in  the  report,  and  by  those 
who  supported  it,  is,  that  the  balance  of  imports  and  exports  never 
can  move  the  exchanges,  either  above  or  below  par,  more  than  just 
enough  to  start  a  movement  of  bullion.  On  a  specie  systera, 
any  outflow  of  bullion  would  bring  down  prices,  and  immedi- 
ately make  a  remittance  of  goods  more  profitable  than  one  of 
bullion  ;  and,  if  the  exportation  of  bullion  was  artificially  con- 
tinued (as,  for  instance,  to  pay  the  expenses  of  a  foreign  war),  it 
would  reduce  prices  until  a  counter  current  would  set  in  and  restore 
the  former  relative  distribution  all  the  world  over,  .  .  .  If,  there- 
fore, there  is  an  outflow  of  gold,  serious  and  long  continued,  ac- 
companied by  an  unfavorable  exchange,  it  is  a  sign  that  there  is 
an  inferior  currency  behind  the  gold,  which  is  displacing  it.  The 
surplus  of  imports  of  goods  above  the  exports  of  goods  is  nothing 
but  the  return  payment  for  this  export  of  gold,  and  is  not  a  cause, 
but  a  consequence.  If,  finally,  we  want  to  turn  this  tide  and  pro- 
duce an  influx,  there  is  only  one  way  to  do  it ;  and  that  is  simply  to 
remove  the  inferior  currency.  As  for  waiting  for  the  balance  of 
trade  to  turn  and  bring  gold  into  a  country  which  has  a  depreciated 
paper  currency,  one  might  as  well  take  his  stand  at  the  foot  of  a 
hill,  and  wait  for  it  to  change  into  a  declivity  before  climbing  it. 

"  The  authorities  of  the  Bank  strenuously  denied  that  their  issues, 
so  long  as  they  were  made  at  five  per  cent  on  bills  representing 
real  transactions,  at  three  months'  date,  could  become  excessive. 
The  Committee  and  their  supporters  held  that  this  rule  would  not 
be  a  guarantee  against  inflation,  but  that,  if  the  exchanges  were 
adverse,  and  bullion  was  being  exported,  it  was  a  sign  that  the 
paper  was  excessive,  and  that  the  Bank  should  check  its  issues. 
The  Bank  maintained  that  it  had  nothing  to  do  with  the  exchanges, 
and  could  not  govern  its  issues  by  any  reference  to  them.  The 
bullionists  maintained  that  while  the  paper  was  inconvertible,  the 
adverse  exchange  and  the  premium  on  gold  were  the  only  signs  by 
which  the  Bank  could  judge  when  its  issues  were  excessive.  Thus 
the  real  issue  was,  whethe^-,  in  case  of  a  drain  of  specie,  we  must 
look  at  the  ratio  of  imports  to  exports,  or  at  the  ratio  of  paper  cur- 


WILLIAM   G.    SUMNER.  419 

rency  to  requirement,  for  the  explanation  of  it  and  the  means  of 
checking  it."^ 

"  There  is  no  such  thing  or  condition,"  says  Mr.  Sumner, 
"  as  balance  of  trade.  If  it  means  equilibrium,  it  may  be  used 
correctly  to  denote  the  equality  of  exports  and  imports ; 
but  then  it  regulates  itself,  and  no  power  can  control  it.  K 
it  means  remainder,  and  suggests  analogies  of  book-keeping, 
it  is  a  mere  myth,  to  which  no  fact  corresj)onds,  and  is  to  be 
entirely  rejected."  If  a  country  export  gold,  it  receives,  lie 
says  in  common  with  the  Economists,  an  equal  value  of  mer- 
chandise. If  it  import  it,  it  exports  an  equal  value  of  mer- 
chandise. Where  is  the  ""balance  of  trade  "  in  transactions 
that  mutually  balance  the  one  the  other  ?  they  triumphantly 
ask,  as  if  that  were  an  end  of  the  whole  question.  But  is  it 
certain  that  countries,  in  parting  with  their  gold,  always  receive 
an  equivalent,  and  are  no  worse  off  therefor?  Suppose  an 
individual  possessed  of  a  thousand  dollars  in  coin  to  expend 
it  in  the  purchase  of  the  necessaries  of  life  even,  his  means  are 
reduced  in  like  ratio.  If  he  would  reinstate  his  former  condi- 
tion, he  must  forego  future  expenditures  to  an  equal  amount. 
So,  if  a  person  run  into  debt  to  his  shopkeeper  to  the  amount 
of  a  thousand  dollars,  if  he  would  pay  it,  he  must  forego  a 
like  amount  of  his  future  earnings.  His  indebtedness  until 
paid  would  very  properly  be  termed  a  balance  of  trade  against 
him.  So  with  a  nation.  If  it  import  more  in  value  of  ordi- 
nary merchandise  than  it  exports,  its  specie  will  have  to  go  to 
make  up  the  deficit.  Now,  no  nation  not  producing  gold  can 
part  with  any  considerable  amount  of  it  without  causing  em- 
barrassment to  its  industries  and  trade  ;  for  the  reason  that  that 
which  it  possessed  and  exported  was  a  part  of  the  machinery 
by  which  these  were  carried  on.  The  tendency  of  the  precious 
metals  the  world  over  is  to  distribute  themselves  according  to 
the  means  and  needs  of  those  using  them.  If  there  be  no 
movement  in  any  direction,  it  is  assumed  that  they  are  in 
proper  equilibrium.  If  this  be  disturbed  in  any  country,  it 
must  be  restored.  If  England,  for  example,  from  any  cause, 
lose  £10,000,000  in  coin,  she  must  bring  the  amount  back 
again,  in  order  to  prosecute  her  industries  on  their  wonted 
scale.     Now  the  imports  that  are  made  by  an  export  of  gold 

1  History  of  American  Currency,  pp.  262-26G. 


420  HISTORY  OF   MOXETAE-Y   THEORIES. 

"will  always  embrace  a  large  number  of  articles  which  the 
nation  might  as  well  be  without  as  with.  The  export  of  a 
large  amount  of  coin  is  usually  due  to  a  vicious  paper  currency, 
and  such  a  currency  is  always  attended  with  wasteful  expendi- 
ture. So  far,  the  position  of  a  nation  is  relatively  weakened ; 
for  she  has  parted  with  that  which  is  essential  to  her  welfare, 
and  must  be  reclaimed  by  future  accumulations.  Mr.  Sumner 
admits  that  the  condition  of  things  described  may  exist,  but 
says  that  no  "  balance  of  trade  "  has  resulted  :  only  that  from 
an  inferior  currency  an  excess  of  a  particular  commodity  has 
been  exported,  to  be  brought  back  by  the  re-exportation  of  that 
received  for  it,  or  its  equivalent ;  and  that,  as  soon  as  the  in- 
ferior currency  is  removed,  the  equilibrium  will  restore  itself. 
Admitting  the  cause,  has  not  the  export  of  coin  resulted  in  a 
loss  ?  and,  if  so,  may  not  the  loss  as  well  be  described  as  an 
"  unfavorable  balance  of  trade  "  as  by  any  other  term  ?  Nor 
is  there  any  want  of  scientific  accuracy  in  that  ordinarily  used. 
The  condition  is  something  more  than  mere  myth,  Mr.  Sum- 
ner's flippant  assertions  to  the  contrary.  A  nation  that  has 
parted  with  its  coin,  which  has  to  be  brought  back  again,  would 
have  been  much  better  off  had  it  never  parted  with  it. 
That  which  has  been  received  will  never  sufiice  to  bring  it 
back ;  and,  if  it  would,  the  charges  of  transportation  and  in- 
terest would  involve  a  large  loss  ;  so  that,  after  all,  "  balance 
of  trade  "  is  a  veritable  fact,  and  always  exists  to  a  greater  or 
less  extent  in  commerce  between  nations,  and  must  always 
exist  until  human  affairs  reach  the  accuracy  and  certainty  of 
natural  laws. 

But  what  is  an  "  inferior  currency  "  ?  One  kind  is  the  in- 
convertible notes  of  government,  issued  not  for  the  purpose  of 
loaning  capital,  but  to  supply  the  lack  of  it.  The  demand  for 
merchandise  must  increase  in  ratio  to  its  amount ;  for  it  is 
always  superadded  to  the  existing  currencies.  As  such  notes 
are  always  made  legal  tender,  they  not  only  drive  coin  out  of 
the  country,  but  keep  it  out  till  they  are  retired.  Such  a  cur- 
rency admits  of  no  corrective  by  the  laws  of  trade.  Another 
"  inferior  "  currency  is  that  issued  by  Banks,  without  a  con- 
stituent. This  exerts,  in  the  outset  and  to  the  amount  of  its 
issue,  precisely  the  same  effects  as  the  notes  of  government. 
Both  equally  tend  to  drive  coin  out  of  the  country,  from  the 


WILLIAM  G.  sum]nt:ii.  421 

consumption  of  foreign  fabrics  to  which  they  lead.  But,  as 
their  paper  is  convertible  into  coin,  the  Banks  must  supply  the 
gold  to  meet  the  expenditures  that  have  been  made.  The 
remedy,  therefore,  is  speedily  applied  by  the  laws  of  trade. 
They  must  pay  for  the  excess  of  imports  over  exports  from 
their  reserves.  It  is  impossible,  however,  for  them  to  tell 
whether  all  the  bills  discounted  by  them  have  their  proper 
constituent :  they  can  only  determine  the  fact  by  the  result. 
If  they  see  gold  beginning  to  move,  they  understand  at  once 
that  improper  bills  have  been  discounted ;  that  the  currency 
has  been  issued  in  excess,  and  must  so  far  be  taken  in  by  a 
reduction  of  their  line  of  discounts.  The  movement  of  gold, 
therefore,  is  an  indication  of  the  state  of  the  currency,  as  in- 
fallible as  is  that  of  the  mercury  of  meteoric  conditions.  It  is 
the  thing  of  all  others  upon  which  an  issuer  of  currency,  at 
the  great  centres  of  trade,  must  keep  his  eye  steadily  fixed, 
and  by  which  he  must  daily  adjust  all  his  operations. 

Mr.  Sumner's  test  of  an  "  inferior  currency  "  is  very  differ- 
ent from  that  which  has  been  described.  With  him,  it  is  not 
a  question  of  quality,  but  of  quantity.  It  is  never  "  inferior," 
so  long  as  its  amount  does  not  exceed  that  required  by  a 
country  in  its  exchanges,  even  if  it  be  not  backed  by  a  single 
dollar  of  coin.  The  conclusion  of  the  Bullion  Committee 
was,  to  use  his  own  words,  "  that  the  value  of  an  inconvertible 
currency  depends  upon  its  amount,  relatively  to  the  needs  of 
a  country  for  a  circulating  medium  :  and  only  to  a  very  sub- 
ordinate degree  upon  the  security  on  which  it  is  based,  or  the 
credit  of  the  issuer."  Their  conclusions,  he  tells  us,  that  the 
value  of  money  depends  upon  its  quantity,  not  upon  the  pro- 
vision made  for  its  convertibility,  "  are  not  matters  of  opinion, 
but  of  demonstration."  If  so,  then  it  is  a  matter  of  demon- 
stration that  one  and  one  make  four.  It  has  been  shown 
over  and  over  again,  in  this  discussion,  that  the  real  or 
estimated  value  of  articles,  whether  they  be  merchandise  or 
money,  is  their  exchangeable  value.  To  assume  otherwise, 
would  be  to  say  that  the  exchangeable  value  of  a  piece  of 
silver  having  the  weight  and  insignia  of  a  sovereign  equals  the 
value  of  a  sovereign.  Humanity  is  not  yet  brought  to  so  low 
a  pitch  as  this.  Even  the  Economists  are  by  no  means  the 
simple  race  their  theories  would  make  them.  In  spite  of  the 
conclusions  of  the  Bullion  Committee,  which,  with  Mr.  Sum- 


422  HISTORY  OF  MONETARY  THEORIES. 

ner,  are  tlie  very  acme  of  financial  wisdom,  lie  would  be  the 
last  man  to  take  a  bank  or  government  note  without  especial 
reference  to  the  provision  made  for  its  discharge.  I£  their 
creed  were  their  law,  a  few  days  would  suffice  for  the  Econo- 
mists to  fool  away  whatever  they  possessed. 

The  following  extracts  from  a  work  entitled  "  The  Elements 
of  Political  Economy,"  by  Mr.  A.  R.  Perry,  Professor  of  Po- 
litical Economy  in  Williams  College,  are  given  as  an  additional 
evidence  of  the  kind  of  pabulum  which  is  dealt  out  to  the 
young  men  in  our  colleges.  He  has  all  the  incoherence  of 
Bonamy  Price,  though  somewhat  less  of  his  rant.  The  reader 
can  make  his  own  criticisms. 


"  There  is  no  use  in  saying  that  money  is  such  a  mysterious  and 
complicated  agent  that  nobody  can  understand  it.  That  is  the 
language  of  indolence.  Money  is  wholly  a  matter  of  man's  device  : 
it  was  invented,  just  as  any  other  instrument  is  invented,  to  ac- 
complish a  certain  purpose ;  and  it  would  be  strange  if  men  can- 
not comprehend  what  men  themselves  have  devised.^ 

"  The  word  '  money,'  a  medium  of  exchange,  is  to  be  taken  in 
its  etymological  and  strict  sense,  as  something  that  comes  between 
two  extremes,  and  serves  also  to  relate  them  to  each  other.  Money 
is  only  a  medium  of  exchange,  and  not  a  real  subject  of  exchange  : 
it  is  a  very  great  help  in  exclianging  all  other  things,  but  is  never 
exchanged  for  itself  in  an  ultimate  transaction.^ 

"  Probably  the  ratio  of  one  to  forty  is  below,  rather  than  above, 
the  true  ratio  of  the  aggregate  money  of  the  commercial  nations 
to  the  money  value  of  their  products,  reckoned  only  once,  which 
their  money  helps  to  exchange.  Therefore  we  see  that  the  hub 
and  spokes  and  rim  of  the  wheel  of  exchange  consist  of  services 
and  commodities  of  every  description ;  while,  to  borrow  the  famous 
comparison  of  Hume,  money  is  but  the  grease  which  makes  the 
wheel  turn  easier.  It  is  a  vast  mistake  to  suppose  that  the  grease 
is  the  wheel  itself.^ 

"  The  difference  between  money  as  a  medium  and  money  as  a 
measure  is  one  that  should  be  clearly  delineated  and  perfectly 
apprehended,  because  there  is  no  such  thing  as  adequately  under- 
standing the  subject  of  money,  unless  the  two  functions  be  kept 
distinct  in  the  mind,  as  well  in  their  single  as  in  their  commingled 
action.  There  is  the  same  difference  between  money  as  a  medium 
and  money  as  a  measure  that  there  is  between  a  bushel  of  wheat 
and  that  round  vessel  by  which  we  determine  that  there  is  a  bushel : 

1  Elements  of  Political  Economy,  p.  188. 

2  Ibid.,  p.  193. 

8  Ibid.,  pp.  195,  196. 


A.   R.   PERRY.  423 

dollars  and  cents  perform  their  duties  as  a  medium  by  virtue  of 
their  being  commodities  ;  they  perform  their  duties  as  a  measure 
by  virtue  of  their  being  denominations.  .  .  .  The  distinction  between 
denominations  and  those  things  themselves  which  are  reckoned  by 
denominations  seems  a  very  obvious  distinction,  and  one  would 
suppose  not  likely  to  be  confounded  ;  but,  the  truth  is,  the  two  are 
perpetually  confounded,  even  in  some  of  the  most  recent  and  ap- 
proved works  on  money.  Indeed,  the  grand  difficulty  and  source 
of  error  in  discussions  on  money  heretofore  has  been  that  this  dis- 
tinction has  rarely,  if  ever,  been  consistently  attended  to  ;  and  I 
flatter  myself  that  I  am  doing  the  science  a  service  at  this  point  by 
calling  attention  to  this  confusion,  by  explaining  how  it  arises,  and 
by  clearing  up,  so  far  forth,  a  vexed  portion  of  the  subject.  .  .  . 

"It  may  be  asked,  Why  cannot  this  source  of  error  be  obviated? 
I  reply  that  the  error  may  be  obviated,  but  the  source  of  it  cannot 
be  obviated,  from  the  nature  of  the  case.  It  was  shown  in  our 
chapter  on  Value,  that  to  find  an  invariable  measure  of  value  is  a 
natural  impossibility.  Money,  as  it  is  the  medium  of  exchange,  is 
also  the  best  attainable  measure  of  value,  and  is  used  throughout 
the  civilized  world  to  compare  with  each  other  all  values  except  its 
own  ;  but  since  value  in  genei-al,  and  the  value  of  money  as  well, 
is  a  thing  of  relation,  and  varies  with  every  change  affecting 
either  of  the  things  exchanged,  as  much  by  changes  affecting 
the  things  it  exchanges  for  as  by  changes  affecting  itself,  —  the 
value  of  a  hat,  for  instance,  as  estimated  in  gloves,  increasing  by 
any  cheapened  process  in  glove-making,  thovigh  no  change  at  all 
take  place  in  the  cost  of  hat-making,  —  a  perfect  measure  of  value 
is  impossible.  Therefore  the  denominations  of  money,  which  is 
the  best  attainable  measure,  can  never  have  a  meaning  absolutely 
fixed,  but  slide  up  and  down  the  scale  along  which  the  purchasing 
power  of  money  as  a  medium  is  moving,  and  they  are  consequently 
useless  as  a  standard  to  detect  any  changes  in  the  medium  itself ; 
while,  the  medium  remaining  uniform,  they  instantly  detect  the 
changes  in  all  other  purchasing  powers.^ 

"  (Society  is  so  constituted  that  a  want  is  felt  in  it  of  some  me- 
dium of  purchase ;  this  want  cannot  be  supplied  without  an  effort ; 
whoever  makes  the  effort  will  demand  a  corresponding  effort  made 
for  him.  When  it  come§  to  the  exchange  of  the  medium  for  the 
wheat,  for  example,  there  stand  face  to  face,  as  in  every  other  in- 
stance of  exchange,  two  desires  and  two  efforts.  There  is  then,  as 
always,  a  reciprocal  estimation  of  the  two  services  about  to  be 
exchanged,  and  the  estimation  agreed  on  is  the  value  of  the 
medium  expressed  in  wheat.  If  the  want  of  any  medium  of  ex- 
change is  less  felt  in  any  community,  or  if  the  effort  required  to 
secure  it  be  for  any  reason  less,  other  things  remaining  the  same, 
the  value  of  the  money  will  be  less  ;  that  is  to  say,  it  will  i)urchase 
less  of  other  things.  If  the  demand  for  money  as  an  instrument 
of  purchase  be  greater,  or  the  obstacles  in  the  way  of  its  supply  be 
increased,  other  things  remaining  as  before,  the  value  of  the  money 

1  Elements  of  Political  Economy,  pp.  203-207. 


424  HISTORY   OF   MONETARY   THEORIES. 

will  be  more.  It  is  the  old  circuit  over  again  of  wants,  efforts,  esti- 
mations, satisfactions.  The  value  of  money  arises  under  the  same 
conditions  as  every  other  value,  and  is  variable  by  every  change  in 
any  one  of  the  four  elements  which  alone  can  vary  the  value  of 
any  thing.  Two  desires  and  two  efforts  invariably  precede  every 
exchange.  A  change  in  any  one  of  these,  the  rest  unchanged,  can 
vary  value,  and  nothing  else  can  vary  it ;  and,  as  it  seems  to  me, 
no  person  has  ever  shown,  or  can  show,  that  the  value  of  money 
is  in  any  respect,  save  the  superficial  one  already  noticed,  excep- 
tional and  peculiar.  And  it  also  seems  to  me  that  nothing  more 
is  needed,  in  order  to  remove  the  last  vestige  of  the  dark  cloud 
which  has  so  long  overhung  this  subject,  than  to  familiarize  one's 
self,  first  of  all,  with  the  true  doctrine  of  value  in  general,  and  then 
hold  fast  the  truth,  exemplified  on  every  side,  that  the  value  of 
money  is  just  like  any  other  value.^ 

"  The  earlier  period  of  the  suspension  proves  this  important 
point,  that  when  a  government  possesses  the  monopoly  of  issuing 
paper  money,  and  carefully  limits  the  quantity  issued,  and  both 
receives  it  and  pays  it  out  as  legal  tender,  it  may  keep  an  incon- 
vertible paper  at  par,  and  even,  by  sufficiently  limiting  its  quantity, 
carry  it  above  par.  But  this  truth  does  not  make  an  inconvertible 
paper  a  good  money  ;  because  it  does  not  make  it  a  self-regulating 
money,  and  because  no  one  is  wise  enough,  nor  ever  will  be,  to  issue 
just  enough,  and  no  more,  of  such  money."  ^ 

Note.  —  The  following  extracts,  taken  from  a  reprint  in  pamphlet  form  of  an 
article  written  by  Hon.  David  A.  Wells,  which  appeared  in  the  "  New  York 
Herald,"  of  Feb.  13,  1875,  "  The  Cremation  Theory  of  Specie  Resumption," 
show  the  flippant  nonsense  which  parades  itself  as  oracular  wisdom  in  the 
newspapers  of  the  day  :  — 

"  In  the  first  place,  I  do  not  believe  that  any  man  can  affirm  how  much  cur- 
rency a  country  wants  or  will  use,  so  long  as  that  currency  is  restricted  to  an 
exclusively  local  circulation.  A  three-cent  piece,  if  it  could  be  divided  into  a 
sufficient  number  of  pieces,  with  each  piece  capable  of  bemg  handled,  would  un- 
doubtedly sufiice  for  doing  all  the  business  of  the  country  in  the  way  of  facilitating 
exchanges  if  no  other  better  instrumentality  was  available.  .  .  .  What  specific 
amount  of  contraction  of  the  legal  tender  would  be  necessary,  no  one  can  tell 
with  certainty.  But,  speaking  generally,  we  can  affirm  with  absolute  certainty 
that,  to  just  the  extent  to  whicii  our  present  volume  of  currency,  supposing  it  to 
be  exclusively  coin,  would,  by  the  laws  of  trade,  be  diminished  by  exportation,  to 
just  that  same  extent  the  volume  of  our  existing  paper  currency  needs  to  be  con- 
tracted to  equalize  its  value  with  coin.  If  the  present  average  premium  on  gold 
represents  and  measures  the  excess  of  currency,  and  we  assume  the  amount 
of  currency  in  active  circulation  at  $750,000,000,  then  a  contraction  of  from 
$80,000,000  to  190,000.000,  and  a  period  of  less  than  four  years,  would  suffice  to 
restore  our  currency'  to  a  specie  basis.  But  if,  oa  the  other  hand,  the  excess  of 
currency  over  and  above  what  is  required  to  do  tlie  business  of  the  country  on 
a  gold  basis  is  greater  than  is  indicated  by  the  present  average  gold  premium  (a 
point  concerning  wiiicli  opinions  differ)  then  a  longer  period  would  be  re- 
quired. But,  sooner  or  later,  if  the  contraction  was  continued,  the  desired  cor- 
respondence would  be  effected. 

"  Again,  a  definite  policy  of  contraction,  once  agreed  and  entered  upon,  it 
does  not  seem  to  me  that  there  need  be  a  single  further  legislative  provision, 
other  than  to  provide  the  means  necessary  to  furnish  the  requisite  supply  of 

1  Elements  of  Political  Economy,  pp.  211,  212.  2  ibid.,  p.  264. 


HISTORY   OF   MONETARY   THEORIES.  425 

The  object  of  the  second  part  of  this  work  has  been,  not 
only  to  trace  the  History  of  Monetary  Theories,  but  to  illus- 
trate the  correctness  of  the  laws  or  principles  previously  laid 
down.  So  firmly  had  become  riveted  in  the  public  mind  the 
ideas,  the  teachings,  and  the  traditions  of  the  past,  —  so  inveter- 
ate the  tendency  to  accept  the  phenomenal  for  the  real,  —  that  it 
is  doubtful  whether  any  statement  of  principles,  no  matter  how 
authoritative  or  conclusive,  could  secure  acceptance,  unless  it 
could  be  shown  at  the  same  time  that  the}^  successfully  disproved 
the  dogmas  or  theories  set  out  in  the  books.     For  twenty-two 

notes  for  cremation.  There  is  no  necessity  of  talking  of  redemption  in  the  sense  of  ex- 
changing  gold  for  notes  on  presentation  and  demand  by  holders  of  the  latter  across  the 
counter  of  the  Treasury." 

A  three-cent  piece  could  hardly  be  cut  up  so  fine  as  to  represent  all  the  notes 
and  checks  as  well  as  coin  now  used  in  the  exchanges  of  the  country.     But  as  a 
value,  according  to  Mr.  Wells,  equal  to  that  of  a  three-cent  piece  would  be  all 
that  would  be  required  in  the  exchanges,  why  not  do  the  next  best  thing,  and 
use  paper  ?     The   cost  of   a  thousand-dollar    note   would  not  equal  one  cent. 
What  other  kind  of  material,  taking  cost  and  portability  into  account,  could  be 
so  appropriate  ?     By  its  use  the  whole  cost  of  a  currency  for  tlie  United  States 
could  not,  indeed,  be  brought  to  Mr.  Wells's   minimum  ;  but  would  come  pretty 
near  it,  considering  the  vast  amount  required.     By  the  use  of  paper,  our  cur- 
rency ought  not  to  cost  over  .^lOO.OOO  annually,  —  a  sum  liardly  more  to  be  thought 
of  than  a  three-cent  piece.     Mr.  Wells,  in  fact,  advocates  the  use  of  a  government 
currency,  only  with  limitations, — the  quantity  not  to  exceed  that  required  for 
the  exchanges  of  the  country.     We  should  be  all  right,  he  says,  if  our  paper 
money  did  not  exceed  the  amount  of  coin  which  but  for  it  would  be  in  circula- 
tion.    We  are  afraid,  if  he  would  reduce  the  amount  of  paper  to  that  of  the 
coin  which  otherwi.se  would  be  in  circulation,  he   would  reduce  it  far  below 
$650,000,000,  or  §350,000,000  even ;  as,  but  for  its  use,  by  far  the  greater  number 
of  transactions  in  which  it  is  used  would  never  take  place.     They  are  rendered 
possible  only  by  the  use  of  paper  money.     As  the  premium  on  gold  when  he 
wrote  equalled  about  12  per  cent  (the  amount  of  paper  in  circulation  at  the  time 
equalling  about  §750,000,000),  a  reduction  of  the  currency  equal  to  .$80,000,000 
or  $90,000,000  would,  he  estimates,  be  sufficient  to  raise  the  whole  value  of  that 
remaining  outstanding  to  par.     This  could  be  done  in  less  than  four  years,  by 
"  cremating  "  §500,000  weekly.     The  premium  has  now  fallen  to  five  per  cent ; 
reducing  the  amount  necessary  to  be  cremated  to  less  than  .$200,000  weekly,  or 
to  $37,500,000  for  the  four  years.     Certainly,  the  nation  should  make  no  great 
ado  about  such  a  paltry  sum  as  this.     The  necessary  amount  might  be  raised  by 
subscription  in  twenty-four  hours.     However,  if  the  question  be  simply  one  of 
quantity,  and  as  with  the  progress  of  our  population  and  commerce  the  amount 
of  our  currency  should  increase  at  least  at  the  rate  of  five  per  cent  annually, 
the  far  better  way,  admitting  the  correctness  of  Mr.  Wells'  assumption  that  the 
question  is  simply  one  of  quantity,  would  be  to  do  nothing  but  wait  till  the 
nation  has  grown  up  to  the  present  volume  of  currency.     As  it  is  now  within 
five  per  cent  of  it,  a  year  at   least  sliould   suffice  to  bring  our  two  kinds  of 
money  upon  a  level.     A  process  so  natural  and  healthy  should  not  be  disturbed 
by  any  kind  of  empiricism. 


426  HISTORY   OF   MONETARY  THEORIES. 

liimdrecl  years,  the  more  important  Laws  of  Money  have  been 
assumed  to  be  settled  beyond  cavil  or  dispute.  These  laws 
are  still  accepted,  in  their  original  integrity,  with  the  same  con- 
fidence as  are  accepted  the  demonstrations  of  Newton  of  the 
laws  which  control  the  motion  of  the  heavenly  bodies.  To 
declare  the  old  ideas  to  be  not  only  inadequate,  but  wholly 
opposed  to  the  fact,  would  have  been  to  be  open  to  the  charge 
of  unwarrantable  presumption,  unless  followed  by  demonstra- 
tions which  should  conclusively  establish  the  correctness  of 
such  an  assumption.  That  no  such  charge  might  be  made, 
the  whole  question  of  money  has  been  carefully  reconsidered, 
and  subjected  to  a  process  of  rigid  analysis.  This  has  shown 
that  its  laws  as  laid  down  in  the  books  have  from  the  outset 
been  wholly  without  warrant,  and  that  the  confusion  which 
has  prevailed  in  reference  to  them  has  been  the  necessary 
result.  The  science  in  its  present  form  is  the  work  of  Aris- 
totle, accepted  by  the  Schoolmen,  and  transmitted  b}'  them  to 
modern  times,  without  having,  in  any  single  instance,  challenged 
or  received  any  thing  like  a  critical  examination.  It  still  re- 
mains a  striking  example  of  the  method  which  assumes  to 
solve  by  dialectics  every  question  coming  within  the  range  of 
human  inquiry.  In  this  science,  its  founder  still  reigns  supreme, 
—  a  most  signal  illustration  of  the  permanence  of  opinions 
after  their  correctness  has  been  once  accepted,  and  the  easy 
immunity  secured  to  them  after  hoary  antiquity  shall  have 
rendered  impious  all  attempt  to  inquire  as  to  their  right  to 
rule. 

The  whole  subject  turns  upon  the  question,  whether  or  not 
value  be  an  essential  attribute  of  money.  That  it  was  a  con- 
venient attribute,  few,  perhaps,  would  deny.  But  such  attribute 
was  held  to  be  useful  chiefly  in  providing  a  way  for  the  retire- 
ment of  whatever  might  exist,  or  be  issued,  in  excess  of  the 
amount  required  in  the  exchanges  ;  and  if  such  excess  could  be 
used,  or  converted  into  that  which  could  be  used,  for  other 
purposes,  then  the  currency  was  self-regulating,  and  so  far 
value  would  be  a  useful  attribute.  But  it  was  of  no  use  so 
long  as  the  money  did  not  exceed  the  public  want :  so  long 
would  its  real  equal  its  nominal  value,  from  the  necessity  of 
its  use  ;  and  so  long  it  was  indiiferent  of  what  material  it 
was  composed,  or  whether  or  not  it  had  a  constituent,  or 
carried  any  obligation.     Such  assumptions  are  laid  down  as 


HISTORY  OF   MONETARY  THEORIES.  427 

fundamental  principles  by  every  writer  upon  the  subject. 
They  have  been  shown,  it  is  believed,  to  be  wholly  opposed 
to  natural  laws,  as  well  as  to  the  common  experience  of  man- 
kind. The  appeal  to  the  empirical  has  fully  sustained  tlie 
conclusions  of  induction.  Such  a  result  being  established, 
there  should  be  an  end  to  this  branch  of  the  discussion,  —  not 
only  from  its  superfluousness,  but  to  spare  the  reader  a  repeti- 
tion which  might  exhaust  his  patience,  but  which  could  add 
notliing  to  the  force  of  his  convictions. 


428      CUEEENCY  AND   BANKING  IN   THE   UNITED   STATES. 


CUREENCY   AND   BANKING   IN    THE 
UNITED  STATES. 


That  which  has  preceded  will  have  prepared  the  way  to  an 
intelligible  discussion  of  the  financial  and  monetary  systems  of 
the  United  States.  It  was  useless  to  undertake  any  thing  of  the 
kind  till  the  whole  subject  of  money  had  been  reconsidered, 
its  laws  determined,  and  applied  to  every  proposition  which 
the  ingenuity  of  the  Economists  could  suggest.  Till  then, 
any  isolated  essay,  or  statement  of  principles,  without  detail- 
ing the  process  by  which  they  were  reached,  would  have  only 
added  to  the  confusion  which  prevailed.  Every  proposition 
to  be  found  in  the  books  in  reference  to  money,  especially 
paper  money,  is  exactly  opposed  to  the  fact.  Although  all 
writers  upon  it  agree  in  the  main,  it  is  always  with  some 
qualification,  in  order  to  show  some  degree  of  independence 
and  originality  ;  so  that  error  itself  takes  a  thousand  different 
shapes.  The  debates  in  Congress  are  simply  the  roar  of 
chaos.  The  laws  of  paper  money  have,  it  is  believed,  been 
placed,  in  what  has  preceded,  upon  impregnable  foundations ; 
and  their  application  made  palpable  to  the  most  ordinary 
understanding.  We  can  now  see  exactly  where  we  stand,  and 
correctly  estimate  the  nature  and  effect  of  our  circulation,  and 
the  methods  or  steps  to  be  taken  to  relieve  ourselves  of  it, 
and  to  provide  one  which,  by  being  capital,  or  the  representa- 
tive of  capital,  will  promote  in  the  highest  possible  degree, 
the  welfare  of  the  nation.  As  our  present  legal-tender  cur- 
rency is  the  second  one  of  the  kind,  —  for  the  existing  govern- 
ment is  to  be  considered  only  as  a  continuation  and  part  of 
that  instituted  at  the  outbreak  of  the  War  of  Independence,  — 
it  becomes  important  to  give  a  brief  sketch  of  the  first,  in 
illustration  of  the  reasons  for  the  issue  of  the  second,  and  of 
the  influence  exerted  by  it  upon  the  operations  of  government, 
as  well  as  upon  those  of  production  and  trade. 


CUREENCY   OF  THE  EE VOLUTION.  429 

Our  government  as  first  organized  was  vested  in  a  Con- 
gress, or  body  of  delegates,  representing  the  thirteen  original 
States.  As  it  did  not  spring  directly  from  the  people,  it  lacked 
that  representative  character  considered  under  our  own  system 
as  well  as  that  of  England  as  indispensable  to  the  exercise  of 
the  right  or  power  of  taxation.  It  could  make  requisitions 
upon  the  States,  but  was  utterly  powerless  to  enforce  them. 
The  latter  still  remained  independent  communities,  united  in  a 
voluntary  confederation  for  the  prosecution  of  the  war.  As 
the  central  Government,  as  the  chief  Executive,  was  com- 
pelled to  act  at  once  in  reference  to  the  necessities  imposed 
upon  it,  it  must  itself  provide  the  means  as  best  it  could. 
Without  the  power  of  taxation,  the  mode  obviously  suggesting 
itself  was  an  issue  of  notes  to  serve  as  money.  All  the  colo- 
nies, in  similar  necessities,  had  issued  greater  or  less  amounts 
of  such  notes  ;  although,  for  some  time  preceding  the  outbreak 
of  the  war,  they  had  been  greatly  reduced,  not  only  from  a 
general  sense  of  their  mischievous  effect,  but  from  an  Act  of 
Parliament  forbidding  their  continued  issue.  Though  the 
results  of  their  issue  had,  without  exception,  been  most  dis- 
astrous, yet  there  is  nothing  in  which  a  community  so  soon 
forgets  the  lessons  of  the  past.  The  first  effect  of  paper 
money  always  seems  beneficent ;  for  it  always  creates  activity 
in  all  the  departments  of  industry  and  trade,  in  ratio  to  its 
amount.  If  this  be  small,  it  will  for  a  considerable  time  cir- 
culate at  only  a  very  slight  discount,  from  the  use  that  can  be 
made  of  it  by  indebted  parties,  for  whom  it  will  have  the 
value  of  gold.  Its  issue,  therefore,  in  the  outset  is  always 
welcome  to  the  great  mass ;  as  in  the  present  enjoyment  and 
satisfaction,  both  past  and  future  are  alike  forgotten  ;  or,  if 
some  uneasiness  and  apprehension  be  felt,  they  are  quieted  by 
the  assumption  that  the  amount  will  be  small,  and  that  what- 
ever may  be  issued  will  speedil}'-  be  taken  in. 

The  first  Continental  Congress  assembled  on  the  10th  of 
May,  1775.  On  the  30th  of  that  month,  the  colony  of  New 
York,  through  its  delegates,  submitted  that  as  from  the  inability 
of  the  National  and  State  Governments  to  raise  money,  either  by 
loans  or  taxation,  notes  of  one  or  the  other,  to  serve  as  money, 
would  have  to  be  resorted  to,  they  should  be  issued  by  the 
General  Government,  from   the  greater  credit  that  would  be 


430      CURRENCY  AND  BANKING  IN  THE   UNITED   STATES. 

attached  to  them,  representing,  as  they  would,  the  whole  coun- 
try ;  the  greater  ease  and  certainty  with  which  their  amount 
could  be  regulated ;  and  the  wider  circulation  which  could  be 
secured.  It  was  also  urged  that  as  the  State  of  New  York 
would,  from  its  central  position,  be  that  in  which  a  large  pro- 
portion of  expenditures  would  be  made,  unless  the  notes  were 
issued  by  the  central  Government,  that  State  would  soon  be 
flooded  with  those  of  other  States,  upon  whose  issues  there 
would  be  no  check,  and  for  which  there  would  be  no  sufficient 
vent,  greatly  to  the  public  detriment.  If  notes  were  to  'be 
issued,  the  reasons  urged  by  the  New  York  delegates  appeared 
to  have  more  force  than  they  really  deserved,  as  the  provisional 
Government  might  cease  at  any  moment  to  exist,  while  those 
of  the  States  would,  in  any  event,  be  continued.  Their  repre- 
sentations, however,  prevailed ;  and  on  the  22d  of  June,  1775, 
an  issue  of  $3,000,000  was  authorized  to  be  made  as  occasion 
required.  Such  was  the  beginning  of  the  Continental  money, 
—  as  humble  and  insignificant,  in  the  outset,  as  the  Genie  of 
the  Arabian  Tales,  whom  a  small  bottle  at  first  sufficed  to  hold, 
but  who,  freed  from  its  imprisonment,  swelled  into  proportions 
so  vast  as  to  enfold  both  sea  and  land.  But  the  Genie  could 
contract  as  well  as  expand.  In  a  freak  of  vanity,  to  show,  his 
power,  he  crept  back  again  into  liis  bottle,  which  the  fisher- 
man who  had  unwittingly  set  him  free  instantly  closed,  and  so 
escaped  with  his  life.  Here  the  parallel  ends  :  for  the  Genie 
of  the  printing  press,  from  an  equally  insignificant  beginning, 
swelled  into  proportions  still  vaster  than  those  of  his  prototype, 
which  no  power,  not  even  his  own,  could  reduce  ;  and  could  be 
got  rid  of  only  by  his  death,  but  not  till  a  whole  nation  was 
very  nearly  brought  to  the  same  desperate  pass. 

The  following  is  a  copy  of  the  notes  first  issued  :  — 

"  CONTINENTAL   CURRENCY. 

"  No. Dollars. 

"This  bill  entitles  the  bearer  to  receive"  (from  one  to  twenty)  "Spanish 
milled  dollars,  or  the  value  thereof  in  gold  or  silver,  according  to  the  resolution 
of  tlie  Congress  held  at  Philadelphia  on  tlie  10th  day  of  May,  a.  d.  1775." 

The  first  issue  of  notes  was  apportioned  among  the  several 
States  in  ratio  to  their  population,  as  their  proper  quota  to  the 
expenses  of  government,  which  were,  in  theory  at  least,  to  be 
borne  by  them  by  virtue  of  their  power  of  taxation,  —  a  power 


CURRENCY   OF   THE   REVOLUTION.  431 

which  the  central  Government  did  not  possess.  The  notes 
issued  were  to  be  returned  for  cancellation  to  the  latter,  in 
ratio  to  the  amount  received,  in  four  annual  instalments,  —  the 
first  one  to  be  paid  before  the  last  day  of  November,  1779  ;  and 
the  last,  on  or  before  the  last  day  of  November,  1782.  The 
smallness  of  their  amount,  and  the  provision  made  for  their 
repayment,  show  how  little  was  foreseen  of  the  long  and 
dreary  struggle  upon  which  the  country  had  already  entered.^ 

No  sooner  had  these  issues  been  made,  than  the  States  made 
the  notes  their  own.  The  first  one  to  act  was  Rhode  Island, 
which  declared  every  person  who  refused  to  take  them  to  be 
a  public  enemy.  Other  States  followed  with  laws  to  a  similar 
effect. 

On  the  29th  day  of  November,  1775,  a  second  issue  of 
$3,000,000  was  authorized,  with  similar  provisions  for  their 
retirement  as  for  that  of  the  first.  This  issue  was  strongly 
opposed  by  Franklin,  who  urged  that  an  attempt  should  be 
made  to  borrow  back  the  notes  first  issued.  He  had  also  urged 
that  all  the  notes  should  bear  interest.  Neither  of  his  recom- 
mendations prevailed. 

The  necessities  of  the  government  still  continuing,  a  third 
issue  of  $4,000,000  was  made  on  Feb.  17,  1776.  Before  the 
close  of  1775,  however,  and  when  only  $6,000,000  of  notes 
had  been  authorized,  an  unwillingness  to  take  them  began  to 
show  itself.  The  first  hesitation  appeared  among  the  Quakers, 
not  from  any  alleged  want  of  their  value,  but  from  conscien- 


'  The  apportionment  among  the  States  was  as  follows  :  — 

New  Hampshire $124,069^ 

Massacimsetts  Bay 434,244 

Khode  Island 71,950^ 

Connecticut 248,139 

New  York 248,139 

New  Jersey 161,290^ 

Pennsylvania 372,208i 

Delaware 37,219^ 

Maryland       310,174^ 

Virginia 496,278 

North  Carolina 248,139 

South  Carolina 248,139 

Total $3,000,000 

Georgia  was  not  included  in  the  apportionment,  as  she  was  not  represented 
in  Congress. 


432      CUEEE^'CY  A^~D   BA^-KEfG  IX   THE  UNITED   STATES. 

tious  scruples  wliicli  forbade  them  to  take,  even  indireetlT,  any 
part  in  war.  The  real  cause  "was  undoubtedlv  distrust,  as  they 
afterwards  showed  no  hesitation  in  taking  them  at  their  mar- 
ket value.  The  rear  closed  disastrously  for  the  American 
cause,  Canada  was  lost :  public  confidence  was  no  little 
shaken.  Rumors  constantly  reached  Congress  of  an  unwill- 
ingness to  receive  its  notes  ;  in  consequence  of  which,  on  the 
11th  of  January,  1776,  only  a  little  more  than  six  months 
after  the  first  issue,  and  only  a  little  more  than  three  after 
they  got  into  circulation,  it  put  forth  the  following  preamble 
and  resolution :  — 

"  Whereas,  It  appears  to  this  Congress  that  several  evil-disposed 
persons,  in  order  to  obstruct  and  defeat  the  efforts  of  the  United 
Colonies  in  defence  of  their  just  rights,  have  attemprted  to  de- 
preciate the  bills  of  credit  emitted  by  the  authority  of  this  Congress, 

"  Resolved,  Therefore,  that  any  person  who  shall  hereafter  be  so 
lost  to  all  virtue  and  regard  for  his  country  as  to  refuse  to  receive 
said  bills  in  payment,  or  obstruct  and  discourage  the  currency  or 
circulation  thereof,  and  shall  be  dulv  convicted  bv  the  committee 
of  the  city,  county,  or  district,  or,  in  case  of  appeal  from  their  de- 
cision, by  the  Assembly,  convention,  council,  or  committee  of 
safety  of  the  Colony  where  he  shall  reside,  such  person  shall  be 
deemed,  published,  and  treated  as  an  enemy  of  his  country-,  and 
precluded  from  all  trade  or  intercourse  with  the  inhabitants  of 
these  Colonies."  ^ 

The  States  did  their  best  to  sustain  the  action  of  the  gen- 
eral crovernment.  Thev  denounced  all  recusants,  and  remitted 
them  for  punishment  to  committees  of  safety,  which  in  many 

1  Would  it  not  have  been  well  for  the  Economists,  who  assert  that  the  only 
cause  of  the  depreciation  of  goremment  notes  is  their  excess  of  issue,  to  explain 
the  cause  of  the  early  decline  in  value  of  the  Continental  money  ?  Evidences  of 
such  decline  in  ralue  manifested  themselves  by  the  time  that  only  a  little  more 
than  §3,000,000  had  got  into  circulation,  the  issue  authorized  Nov.  29,  1775,  not 
being  actually  made  until  after  the  close  of  that  year.  The  coin  in  circulation 
at  the  outbreak  of  the  war  was  variously  estimated  as  from  $12,000,000  to 
$30,000,000.  Considering  the  largely  increased  expenditures  of  government,  an 
addition  to  the  currency  of  -$»j,000,000  of  notes  could  certainly  not  be  regarded 
as  excessive,  if  that  kind  of  money  were  to  be  resorted  to.  Professor  Fawcett 
assumes  that  a  country  engaged  in  war  may  issue,  in  addition  to  the  currency  in 
circulation,  its  own  notes  to  serve  as  money,  in  ratio  to  its  increased  expenditures 
without  affecting  prices,  or  what  is  the  same  thing,  without  causing  a  deprecia- 
tion of  their  value.  Is  it  not  astonishing  that  the  Economists  should  have  gone 
on  repeating  Adam  Smith  for  a  century,  without  once  stopping  to  interrogate 
history,  or  to  investigate  the  conditions  upon  which  the  value  of  all  currencies 
must  rest? 


CURRENCY  OF  THE  REVOLUTION.  433 

cases  had  hardly  any  more  sense  of  justice  than  infuriated 
mobs.  Newspapers  were  by  no  means  wanting  in  the  same 
direction. 

"  When  paper  money,"  says  a  T\Titer  of  the  time,  in  one  of  them, 
"circuhites  in  the  common  com'se  of  trade,  its  vahxe  gradually 
rises  and  falls  in  proportion  to  its  quantity,  when  relatively  con- 
sidered with  the  value  of  the  real  effects  of  a  country,  such  as 
houses,  lands,  provisions,  gold,  silver,  and  merchandise  of  every  kind  ; 
for  though  paper  merely  has  not  any  significant  value  in  itself,  and 
has  onlysuch  value  as  we  place  upon  it,  a  single  dollar  bill  being 
as  lai-ge  as  an  eight  dollar  bill,  yet,  as  by  general  consent  we 
agree  to  receive  and  pass  this  as  o«e  and  that  as  eight,  so  long  as 
this  mutual  confidence  and  resolution  contiiuics,  they  are  to  all 
intents  and  jnxrposes  of  as  much  real  worth  as  so  much  actual  gold 
and  silver,  which  are  of  themselves  of  no  other  absolute  value  than 
what  mankind  have  been  pleased  to  fix  on  them.^  ... 

"  It  is  a  grand  continental  ex]ieriment  we  are  trying,  and  nothing 
but  the  experiment  itself  can  determine  the  expediency :  we  are 
not  to  look  on  our  present  situation  as  a  matter  of  choice,  but  of 
necessity  ;  we  have  got  into  a  labyrinth,  and  must  get  out  of  it  as 
well  as  we  can.  If,  by  giving  a  general  credit  to  our  money  and 
forcing  a  trade,  we  should  weary  out  Great  Britain,  or  involve  her 

1  This  brief  paragraph,  v?ritten  before  the  publication  of  the  "  "Wealth  of 
Nations,"  embodies  tlie  substance  of  all  that  was  ever  written  upon  the  subject 
of  paper  money ;  and,  compared  with  the  loose  and  incoherent  treatise  of  Adam 
Smith,  is  a  model  of  conciseness  both  in  thought  and  style.  It  shows  the  ab- 
surdity of  any  claim  for  him  for  originality  upon  the  subject  of  money.  All  he 
did  was  to  obscure  and  perplex,  by  irrelevant  illustrations  and  unmeaning  ver- 
biage, a  subject  whicli  had  been  most  perfectly  stated  —  that  is,  according  to  his 
views,  if  he  had  any  — by  those  who  preceded  him,  but  which  he  neither  investi- 
gated nor  understood. 

"  The  American  paper  money,"  says  John  Adams,  "  is  nothing  but  bills  of 
credit,  by  which  the  public,  the  community,  promises  to  pay  the  possessor  a 
certain  sura  in  a  certain  limited  time.  In  a  country  where  there  is  no  coin,  or 
not  enough  in  circulation,  these  bills  may  be  emitted  to  a  certain  amount,  and 
they  will  pass  at  par ;  but  as  soon  as  the  quantity  exceeds  the  value  of  the 
ordinary  business  of  the  people,  it  will  depreciate,  and  continue  to  tall  in  it-s 
value  in  proportion  to  the  augmentation  of  the  quantity."  —  Adams's  Works, 
vol.  vii.  p.  296. 

The  writer  who  at  the  time  best  appreciated  the  nature  and  effect  of  paper 
money  was  Pelatiah  Webster,  who  published  a  series  of  essays,  the  first  under 
date  of  the  5th  of  October,  1776,  which  were  continued  diu-ing  the  war.  He 
early  presented,  with  great  clearness  and  force,  the  danger  that  was  being  in- 
curred from  the  issue  of  government  notes,  and  constantly  urged  the  retirement 
of  the  "  superfluity,"  in  order  to  avoid  the  catastrophe  which  he  predicted  and 
subsequently  described.  His  essays  are  to  be  thoroughly  studied,  if  one  would 
gain  any  thing  like  an  adequate  picture  of  the  time.  He,  however,  by  no  means 
grasped  tlio  wliole  subject.  It  was  the  "  excess  "  that  he  wished  to  get  rid  of, 
forgetting  that  every  dollar  of  the  kind  is  always  iu  excess. 

28 


434      CURKENCY  AND    BANKING  IN   THE   UNITED    STATES. 

in  a  war  with  some  of  her  European  neighbors,  we  may  then  take 
our  own  time  to  pay  off  the  debt  we  have  been  contracting,  and 
every  year  will  restore  the  currency  nearer  to  its  original  value. 
To  what  extent  a  country  may  venture  to  run  itself  in  debt  is  a 
question  beyond  my  abilities  to  solve.  "Whether  a  community  and 
an  individual  may  with  projH-iety  be  compared,  I  cannot  pretend  to 
determine ;  but,  if  the  comparison  would  hold,  I  should  say  that 
as  an  individual  has  a  right  to  spend  or  run  in  debt  to  the  exact 
amount  of  what  he  is  worth,  without  injury  to  his  creditors,  so 
may  a  community  ;  if  this  be  true,  it  may  be  easy  to  determine  how- 
much  farther  we  may  safely  go."  ^ 

The  arguments  presented  in  the  preceding  paragraphs  un- 
doubtedly appeared  conclusive  enough  to  their  writers  when 
they  were  not  immediately  engaged  in  paying  or  receiving 
money ;  but  when  they  came  to  act,  they  were  governed  by  a 
law  far  more  potent  than  that  which  their  feeble  natures 
attempted  to  set  up.  The  loudest  advocates  of  the  doctrine 
that  the  value  of  money  depended  upon  convention  —  upon 
its  quantity,  not  upon  its  quality  —  are  not  in  the  least  degree 
influenced  by  their  arguments.  They  never  became  parties  to 
a  convention  to  accept  a  note  for  $10,  utterly  worthless  in 
itself,  for  merchandise  equalling  its  nominal  value  in  coin.  Nor 
is  there  the  slightest  evidence  or  probability  that  the  notes 
then  issued  ever  circulated  at  any  other  than  their  estimated 
value  ;  while  it  was  inevitable  that  confidence  in  them  should 
decline  in  ratio  to  the  extraordinary  efforts  made  to  sustain 
their  price.  The  writer  also  forgot  that  the  money  of  a 
country  represents  the  proper  amount  of  its  consuming  power, 
which  equals  only  its  annual  product,  not  its  lands,  machin- 
ery, public  works,  and  the  like,  which  are  to  form  the  basis  of 
production,  and  are  not  the  proper  subjects  of  consumption. 

The  necessities  of  the  government  still  continuing,  with  no 
other  resource  than  its  notes,  it  authorized,  on  the  6th  day  of 
May,  1776,  a  further  issue  of  15,000,000  ;  one-half  of  which  was 
to  be  made  in  June,  and  the  other  half  in  July  of  that  year.  A 
serious  decline  in  the  value  of  the  notes  followed.  This  was 
increased  by  a  further  issue  of  $5,000,000  in  November.     Gov- 

1  In  illustration  of  the  intense  patriotic  feeling  which  prevailed  at  the  time, 
it  may  be  stated  tliat,  early  in  1776,  some  American  privateers,  who  brought  into 
Philadelphia  $22,000  in  specie  captured  from  the  enemy,  offered  that  entire  sura 
to  Congress  in  exchange  for  its  notes,  and  received  the  thanks  of  that  body  for 
their  generous  conduct. 


CUKKENCY   OE   THE   REVOLUTION.  435 

eminent,  to  check  the  decline,  directed  General  Putnam,  then 
in  command  of  the  army  at  Philadelphia,  to  issue  an  order, 
under  date  of  Dec,  14,  1776,  that  if  any  one  refused  to  take 
the  government  notes  in  payment  for  goods,  the  goods  should 
be  forfeited,  and  the  person  so  refusing  should  be  thrown 
into  prison.^  These  orders  produced  no  other  effect  than  to 
increase  the  decline.  The  state  of  things  near  the  close  of 
the  year  will  be  best  shown  by  a  letter  written  by  Robert 
Morris  to  one  of  the  government  agents  in  Europe,  "under  date 
of  21st  of  December,  1776  :  — 

.  ..."  I  must  add,"  he  says,  "  to  this  gloomy  picture  one  cir- 
cumstance more  distressincj  than  all  the  rest,  because  it  threatens 
instant  and  total  ruin  to  the  American  cause,  unless  some  radical 
cure  is  applied  and  tliat  speedily  :  I  mean  the  depreciation  of  the 
Continental  currency.  The  enormous  pay  of  our  army,  the  enor- 
mous expenses  at  which  they  are  supplied  with  provisions,  clothing, 
and  other  necessaries,  and,  in  short,  the  extravagance  that  has  pre- 
vailed in  most  departments  of  the  public  service,  have  called  forth 
prodigious  emissions  of  paper  money,  both  Continental  and  colo- 
nial. Our  internal  enemies  —  who,  alas  !  are  numerous  and  i*ich  — 
have  always  been  undermining  its  value  by  various  artifices  ;  and, 
now  that  our  distresses  are  wrought  to  a  pitch  by  the  successes  and 
near  approach  of  the  enemy,  they  speak  plainly,  and  many  persons 
peremptorily  refuse  to  take  it  at  any  rate.  Those  that  do  receive 
it,  do  it  with  fear  and  trembling  ;  and  you  may  judge  of  its  value 
even  amongst  those,  when  I  tell  you  that  £250  Continental  cur- 
rency, or  6G6^  dollars,  is  given  for  a  bill  of  exchange  of  £100 
sterling,  sixteen  dollars  for  a  half-johannes,  two  paper  dollars  for 
one  of  silver,  three  dollars  for  a  pair  of  shoes,  twelve  dollars  for  a 
hat,  and  so  on.  A  common  laborer  asks  two  dollars  a  day  for  his 
work,  and  idles  half  his  time. 

"  All  this  amounts  to  real  depreciation  of  the  money.  The  war 
must  be  carried  on  at  an  expense  proportional  to  this  value, 
which  must  inevitably  call  for  immense  emissions,  and  of  course 
still  further  depreciations  must  ensue.  This  can  only  be  prevented 
by  borrowing  in  the  money  now  in  circulation.  The  attempt  is 
made,  and  I  hope   will  succeed  by  loan  or  lottery.     The  present 

>  "Philadelphia,  Dec.  14, 1776. 
.  .  .  .  "  The  General  commanding,  to  his  great  astonishment,  has  been  in- 
formed that  several  of  the  inliabitants  of  this  city  have  refused  to  take  the  Con- 
tinental currency  in  payment  of  goods.  In  future,  should  any  of  the  inhabitants 
be  so  lost  to  public  virtue  and  the  welfare  of  their  country  as  to  presume  to 
refuse  the  currency  of  the  American  States  in  payment  for  any  commodities 
they  may  have  for  sale,  the  goods  sliall  be  forfeited,  and  the  person  or  persons 
80  refusing  shall  be  kept  in  close  confinement. 

"Israel  Putnam, 

"  Major  General." 


436      CUKEENCY   AND   BANKING  IN   THE   UNITED    STATES. 

troubles  interrupt  these  measures  here,  and  as  yet  I  am  not  informed 
how  they  go  on  in  other  States.  But  something  more  is  necessary : 
force  must  inevitably  be  employed,  and  I  dread  to  see  that  day. 
We  have  already  calamities  sufficient  for  any  country,  and  the 
measure  will  be  full  when  one  part  of  the  American  people  is 
obliged  to  dragoon  another,  at  the  same  time  that  they  are  opposing 
a  most  powerful  external  foe." 

In  a  letter  to  the  President  of  Congress,  under  date  of 
Dec.  23,  1776,  he  speaks  in  a  similar  strain  :  — 

"  It  is  very  mortifying  to  me  when  T  am  obliged  to  tell  you  dis- 
agreeable things  ;  but  I  am  compelled  to  inform  Congress  that  the 
Continental  currency  keeps  losing  in  credit.  Many  refuse  openly 
and  avowedly  to  receive  it ;  and  several  citizens  that  retired  into 
the  country  must  have  starved,  if  their  own  private  credit  had  not 
procured  them  the  common  necessaries  of  life  when  nothing  could 
be  got  for  your  money.  Some  effectual  remedy  should  be  speedily 
applied  to  this  evil,  or  the  game  will  be  up.  Mr.  Commissary 
Wharton  has  told  the  General  that  the  mills  refuse  to  grind  for 
him,  either  from  disaffection,  or  dislike  to  the  money.  Be  that  as  it 
may,  the  consequences  are  terrible  ;  for  I  do  suppose  the  army  will 
not  consent  to  starve." 

As  the  alarm  and  apprehension  for  the  future  increased, 
("iongress,  in  order  to  allay  them,  adopted,  on  the  14tli  of  Jan- 
uary, 1777,  the  following  preamble  and  resolution  :  — 

"  Whereas^  The  Continental  money  ought  to  be  supported  at  the 
full  value  expressed  in  the  respective  bills,  by  the  inhabitants  of 
these  States,  for  whose  benefit  they  were  issued,  and  M'ho  stand 
bound  to  redeem  the  same  accordhig  to  the  like  value  ;  and  the 
pernicious  artifices  of  the  enemies  of  American  liberty  to  impair 
the  credit  of  the  said  bills,  by  raising  the  nominal  value  of  gold 
and  silver,  or  any  other  species  of  money  whatsoever,  ought  to  be 
guarded  against  and  prevented  : 

'■'' Mesolved,  That  all  bills  of  credit  emitted  by  the  authority  of 
Congress  ought  to  pass  current  in  all  jiayments,  trade,  and  dealings 
in  these  States,  and  be  deemed  in  value  equal  to  the  same  nomi- 
nal sums  in  Spanish  milled  dollars ;  and  that  whosoever  shall  offer, 
ask,  or  receive  more  in  the  said  bills,  for  any  gold  or  silver  coins, 
bullion,  or  any  other  species  of  money  whatsoever,  than  the  nomi- 
nal sum  or  amount  thereof  in  Spanish  milled  dollars,  or  more  in 
the  said  bills,  for  any  lands,  houses,  goods,  or  commodities  whatso- 
ever, than  the  same  could  be  purchased  at  of  the  same  person  or 
l^ersons  in  gold,  silver,  or  any  other  species  of  money  whatsoever  ; 
or  shall  offer  to  sell  any  goods  or  commodities  for  gold  and  silver, 
or  any  other  species  of  money  whatsoever,  and  refuse  to  sell  the 
same  for  the  said  Continental  bills,  —  every  such  a  person  ought  to 
be  deemed  au  enemy  to  the  liberties  of  these  United  States,  and 


CITRRENCY   OF   THE   REVOLUTION.  437 

to  forfeit  the  value  of  the  money  so  exchanged,  or  house,  land,  or 
commodity  so  sold  or  offered  to  sale.  And  it  is  recommended  to 
the  legislatures  of  the  respective  States  to  enact  laws  inflicting 
such  forfeitures  and  other  penalties  on  offenders,  as  aforesaid,  as 
will  ]irevent  such  pernicious  practices. 

"That  it  be  recommended  to  the  legislatures  of  the  United 
States  to  pass  laws  to  make  the  bills  of  credit  issued  by  Congress 
a  lawful  tender  in  payment  of  public  and  private  debts  ;  and  a 
refusal  thereof  an  extinguishment  of  such  debts  ;  that  debts  pay- 
able in  sterling  money  be  dischargeable  in  Continental  dollars  at 
the  rate  of  45.  Qd.  sterling  per  dollar ;  and  that,  in  discharge  of  all 
other  debts  and  contracts,  Continental  dollars  pass  at  the  rate  fixed 
by  the  respective  States  for  the  value  of  Spanish  milled  dollars  ; 
that  it  be  recommended  to  the  legislatures  of  the  several  States  to 
pass  resolutions  that  they  will  make  provisions  for  drawing  in  and 
sinking  their  respective  quotas  of  the  bills  emitted  by  Congress  at 
the  several  periods  fixed,  or  that  shall  be  fixed,  by  Congress.  That 
it  be  recommended  to  the  legislatures  of  the  several  States  to 
raise  by  taxation  in  the  course  of  the  ensuing  year,  and  remit  to 
the  treasury,  such  sums  of  money  as  they  shall  think  will  be  most 
l^roper  in  the  present  situation'  of  the  inhabitants  ;  which  sums 
shall  be  carried  to  their  credit,  and  accounted  in  the  settlernent  of 
their  proportion  of  the  public  expenses  and  debts,  for  which  the 
United  States  are  jointly  bound." 

The  situation  was  indeed  most  critical.  Congress  was  with- 
out means,  except  those  raised  through  its  notes,  which  were 
already  largely  depreciated,  and  becoming  more  so  day  by 
day,  as  no  one  would  longer  receive  them  at  their  nominal 
value.  It  passed,  27th  of  December,  1776,  a  resolution  em- 
powering Washington  to  raise  forces,  and  take  whatever  could 
be  found  necessary  for  their  subsistence  or  clothing  ;  and  if  the 
owner  would  not  sell  at  a  fair  price,  to  be  paid  in  Contine-ntal 
mone}^  he  might  be  arrested,  and  kept  in  confinement.  The 
Committee  of  Safety  of  Pennsylvania  were,  at  the  same  time, 
requested  to  take  speedy  and  rigorous  measures  to  punish, 
all  who  refused  to  receive  the  government  notes.  It  acted 
with  commendable  promptness  ;  and,  on  the  31st  of  December, 
of  the  same  year,  it  resolved,  —  and  its  resolution  at  such  time 
had  all  the  force  of  a  legal  enactment,  —  that  if  any  person 
should  refuse  to  receive  government  notes  offered  to  him  in  pay- 
ment for  goods,  he  should  forfeit,  for  the  first  offence,  the  goods 
to  the  party  seeking  their  purchase  ;  and,  in  addition,  be  liable 
to  a  penalty  of  £o,  where  the  amount  to  be  purchased  was 
under  that  sum  ;  and  to  a  penalty  equal  in  amount  to  that  of 
the  purchase,  when  it  was  above  it.     One-foui"th  part  of  the 


438      CURRENCY   AND   BANKING   IN   THE   UNITED    STATES. 

penalty  was  to  be  paid  to  the  informer,  and  three-fourths  to 
the  State.  For  a  second  offence,  in  addition  to  the  above 
penalties,  the  offending  party  was  rendered  liable  to  banishment 
from  the  State  to  any  place  the  Committee  might  designate. 
The  result  was  that  shop  and  inn  keepers  took  down  their  signs, 
and  refused  to  expose  their  goods  or  premises  for  sale  or  use. 
It  was  the  reign  of  anarchy  as  well  as  tyranny.  That  the 
nation  did  not  speedily  succumb,  and  its  cause  utterly  col- 
lapse, was  due  to  the  fact,  that  the  greater  part  of  the  people 
were  cultivators  of  tlie  soil,  and  in  the  possession  of  an  abun- 
dance of  fertile  land,  which,  with  very  little  labor,  brought 
forth  abundant  crops.  The  bounty  and  forces  of  natm-e  more 
than  compensated  for  the  poverty  and  weakness  of  man. 

The  total  amount  of  notes  issued  in  1776  equalled 
$19,000,000  ;  and,  for  1775  and  1776,  825,000,000.  To  meet 
the  increasing  unwillingness  on  the  part  of  the  public  or  mal- 
contents to  receive  them,  the  States  established  tariifs  of 
prices,  by  which  all  goods  were  to  be  sold.  The  four  New 
England  States  met,  by  their  delegates,  at  Providence,  on  the 
25th  of  January,  1777,  and  formed  a  tariff  of  prices,  by  which 
a  bushel  of  wheat  was  made  the  equivalent  of  7s.  Qd.  in  notes  ; 
one  of  rye,  6s. ;  a  pound  of  wool,  2s. ;  a  bushel  of  salt,  from 
10s.  to  12s. ;  a  gallon  of  rum,  6s.  Sd.  ;  a  pound  of  raw  cotton, 
33s.  ;  and  so  on,  through  the  whole  list  of  articles  ordinarily 
consumed.  Congress  immediately  passed  an  approving  vote, 
and  recommended  other  States  to  follow  the  example  ;  that 
the  delegates  from  Virginia  and  other  Middle  States  should 
meet  at  Yorktown,  on  the  third  Monday  of  the  ensuing  ISIarch, 
and  those  from  the  Southern  States,  at  Charleston,  on  the  first 
Monday  of  the  ensuing  May,  to  concert  and  adopt  similar 
measures.  Congress,  at  the  same  time,  earnestly  entreated  the 
States  to  cease  the  issue  of  their  own  notes,  and  to  forbid  the 
circulation  of  those  issued  previous  to  April  19,  1775.  These 
had  been  issued  in  immense  amounts  in  nearly  all  of  the 
States,  and  very-  seriously  interfered  with  the  operations  of 
the  Central  Government.  As  the  State  Governments  possessed 
the  power  of  taxation,  which  the  Central  Government  did 
not,  their  notes  began  to  be  preferred,  and  were  hoarded  in 
large  amounts.^ 

1  As  all  government  currencies  are  the  same  in  kind,  a  sketch  of  that  issued 
by  the  central  one  will  suffice  for  all  issued  at  the  time.    All  were  issued  from 


CUERENCY  OF  THE  EEVOLUTION.  439 

Meanwhile  the  embarrassments  of  the  government  were  no 
little  increased  by  the  immense  amount  of  spurious  notes 
thrown  into  circulation,  —  a  matter  of  very  little  difficulty,  from 
the  inartistic  manner  in  which  its  own  were  printed  or  en- 
graved. These  counterfeits  were  held  to  be  the  tricks  of  the 
enemy.  The  results  of  the  war,  during  the  whole  year  of 
1776,  continued  adverse,  which  greatly  increased  the  confi- 
dence and  influence  of  the  Tories,  who  were  especially  numer- 
ous and  powerful  in  the  State  of  New  York.  Congress  had 
still  little  other  resource  than  its  notes.     In  the  latter  part  of 

1776,  Benjamin  Franklin  was  sent  to  France,  in  the  hope  of 
securing  the  co-operation  of  that  country.  Although,  for  some 
time,  he  could  not  obtain  any  open  recognition  of  the  cause 
of  the  patriots,  he  was  enabled  to  secure  loans  tb  the  amount 
of  8,000,000  livres,  which  were  expended  chiefly  in  the  pur- 
chase of  arms  and  supplies,  all  of  which  safely  reached  their 
destination.  In  this  way  he  was  of  great  service,  although  he 
could  do  but  little  to  relieve  the  pressure  upon  the  Home  Gov- 
ernment. The  cause  of  the  patriots  at  the  time  was  at  its 
lowest  ebb.  France,  though  desirous  of  doing  all  in  her  power 
in  their  aid,  was  not  willing  to  take  any  step  likely  to  embroil 
her  in  war,  till  their  success  was  better  assured.  This  assur- 
ance came  from  the  capture  of  Burgoyne,  in  the  latter  part  of 

1777,  That  was  properly  regarded  as  an  achievement  of  the 
first  magnitude  ;  and  her  government,  on  the  6th  of  February, 

1778,  entered  into  a  treaty  of  alliance  and  commerce  with 
the  United  States  ;  made  their  cause  her  own ;  dispatched 
powerful  fleets,  with  considerable  bodies  of  troops,  to  America  ; 
and  from  time  to  time  made  considerable  loans  of  money .^  For 
the  present,  however.  Congress  had  no  other  resource  than  its 
notes  ;  and  on  the  26th  of  February,  1777,  it  made  a  further 
issue  of  15,000,000  ;  on  the  27th  of  May,  of  the  same  year, 
an  issue  to  an  equal  amount ;  on  the  15th  of  August,  one  of 
11,000,000  ;  on  the   7th    of  November,  $1,000,000,  and   the 

the  same  necessity  ;  all  produced  precisely  the  same  results  ;  and  all,  in  great 
measure,  met  the  same  fate.  Such  of  the  State  issues  as  were  redeemed,  were 
taken  in  at  very  low  rates.  Of  the  loss  and  suffering  which  were  caused  by  them 
all,  no  pen  or  pencil  can  present  any  thing  lilce  an  adequate  picture. 

1  The  total  amount  of  money  borrowed  by  tlie  United  States  from  France, 
during  the  War  of  the  Revolution,  as  recognized  by  the  United  States  after  the 
adoption  of  the  Constitution,  equalled  34,532,364  livres.  The  arrears  of  interest 
due  up  to  tlie  first  day  of  January,  1790,  equalled  8,967,912  livres ;  making  a 
total  of  48,500,276  livres,  or  $7,895,300. 


440       CURRENCY  AKD   BANKING   IN  THE   UNITED   STATES. 

same  amount  on  the  3d  of  December,  1777  :  the  total  issue 
for  the  year  being  $13,000,000.  The  amount  outstanding  at 
the  close  of  1777  was  $38,000,000.  The  value  of  the  notes  at 
that  time  was  reduced  in  ratio  of  four  to  one.  At  the  date 
last  named.  Congress  made  a  requisition  upon  the  States  to  the 
amount  of  $5,000,000. ^  The  amounts  called  for  were  not  con- 
sidered as  the  proper  proportions  for  each  State  ;  but  were 
made  rather  with  reference  to  the  present  abilities  of  each, 
the  territories  of  several  of  them  being  largely  held  by  the 
enemy.  The  proceeds  were  to  be  put  to  the  credit  of  their 
States,  which  were  to  be  allowed  interest  at  the  rate  of  six 
per  cent  on  their  respective  amounts,  until  the  proper  quotas 
were  adjusted  for  each  by  the  the  final  action  of  Congress. 
The  excess  of  payments  or  contributions  was  to  take  the  form 
of  a  debt  against  the  government.  If  a  deficit  should  be 
found  against  any  State,  this  was  to  be  made  good  by  further 
requisitions.  Congress  again  urged  the  withdrawal  of  the 
currencies  of  the  States,  and  still  invoked  their  aid  in  securing 
the  circulation  of  the  government  notes,  and  in  continuing 
the  tariff  regulating  prices. 

The  year  1778  was  comparatively  an  uneventful  one.  The 
nation,  however,  was  greatly  buoyed  up  by  the  success  achieved 
at  the  close  of  the  previous  one,  and  attempted  to  make  large 
loans  in  Euroj)e,  in  the  expectation  of  which  its  own  financial 
affairs'  were  greatly  neglected.  Congress  again  attempted, 
without  success,  to  compel  the  States  to  take  in  their  notes 
issued  previous  to  the  outbreak  of  the  war.     It  still  had  little 

1  The  apportionment  among  the  several  States  was  as  follows  :  — 

New  Hampshire §200,000 

Rhode  Island  and  Providence  Plantations    ....  100,000 

New  York 200,000 

Penns3^Ivania 620,000 

Maryland 520,000 

North  Carolina 250,000 

South  Carolina 500,000 

Virginia 800,000 

Delaware       60,000 

New  Jersey 270,000 

Connecticut 600,000 

Massachusetts  Bay 820,000 

Georgia 60,000 

Total §5,000,000 


CrEEENCY   OF   THE  EEVOLTJTION.  441 

other  resource  tlian  its  own  ;  and  on  tlie  Sth  of  January,  1778, 
was  driven  to  issue  $1,000,000,  and  $2,000,000  on  the  22d 
of  the  same  month.  The  winter  of  1777-78  was  passed  by 
the  army  at  Valley  Forge  in  a  condition  of  the  greatest  want 
and  suffering.  It  was  literally  without  food  or  clothing.  As 
supplies  could  not  be  had  for  the  notes  of  the  government, 
commissaries  were  authorized  to  seize  whatever  they  could  lay 
their  hands  upon,  paying  therefor  in  government  certificates. 
But  even  such  harsh  measures  availed  little  in  a  country  a 
prey  alike  to  the  enemy's  troops  and  its  own.  As  notes  were 
still  the  only  resource,  these  were  issued,  in  the  months  of 
February,  March,  and  April,  1778,  to  the  extent  of  $10,500,000. 
At  the  end  of  April,  their  value  had  fallen  as  low  as  six  to  one 
of  specie  ;  the  amount  then  outstanding  equalling  $51,000,000. 
In  May  came  the  news  of  the  French  alliance,  in  consequence 
of  which  the  price  of  the  notes  rose  to  one-fourth  their  nominal 
value.  Encouraged  by  the  improved  aspect  of  affairs.  Con- 
gress, on  the  Sth  of  that  month,  issued  an  address  to  the  nation, 
which  was  read  in  all  the  pulpits,  as  the  best  mode,  at  the 
time,  of  bringing  it  to  the  attention  of  the  people.  From  this 
the  following  extracts  are  given  :  — 

"  After  the  unremitting  efforts  of  our  enemies,  we  are  stronger 
than  before.  Nor  can  the  wicked  emissaries,  who  so  assiduously 
labor  to  promote  their  cause,  point  out  any  one  reason  to  suppose 
that  we  shall  not  receive  daily  accessions  of  strength.  They  tell 
you,  it  is  true,  that  your  money  is  of  no  value,  and  your  debts  so 
enormous  that  they  can  never  be  paid.  .  .  . 

"  Surely  there  is  no  man  so  absurd  as  to  suppose  that  the  least 
shadow  of  liberty  can  be  jireserved  in  a  dependent  connection  with 
Britain.  .  .  . 

"  And  this  mad,  this  impious  system,  they  would  lead  you  to 
adopt,  because  of  the  derangement  of  your  finances. 

"  It  becomes  you  deeply  to  reflect  on  this  subject.  Is  there  a 
country  upon  earth  which  hath  such  resources  for  the  payment  of 
her  debts  as  America  ?  such  an  extensive  territory  ?  so  fertile,  so 
blessed  in  its  climate  and  productions?  Surely  there  is  none; 
neither  is  there  any  to  which  the  wise  Europeans  will  sooner  con- 
fide their  property.  What,  then,  are  the  reasons  that  your  money 
hath  depreciated  ?  Because  no  taxes  have  been  imposed  to  carry 
on  the  war  ;  because  your  commerce  hath  been  interrupted  by 
your  enemy's  fleet ;  because  their  armies  have  ravaged  and  deso- 
lated a  part  of  your  country  ;  because  their  agents  have  villainously 
counterfeited  your  bills  ;  because  extortioners  among  you,  inflamed 
with  the  lust  of  gain,  have  added  to  the  price  of  every  article  of 
life ;  and  because  weak  men  have  been  artfully  led  to  beUeve  that 


442       CUREENCY  AND   BAKKING  IN"   THE   UXITED   STATES. 

it  is  of  no  value.  How  is  this  dangerous  disease  to  be  remedied  ? 
Let  those  among  you  who  have  leisure  and  opportunity  collect  the 
money  which  individuals  in  their  neighborhood  are  desirous  of 
placing  in  the  public  funds.  Let  the  several  legislatures  sink  their 
respective  issues  ;  that  so,  there  being  but  one  kind  of  bills,  there 
may  be  less  danger  of  counterfeit.  "Refrain  a  little  while  from 
purchasincr  those  things  which  are  not  absolutelvnecessarv  ;  so  that 
those  who  have  engrossed  commodities  may  suffer  (as  they  de- 
servedly will)  the  loss  of  their  ill-gotten  hoards,  by  reason  of  the 
commerce  with  foreign  nations,  which  fleets  will  protect." 

The  new  alliance  paved  the  way  for  considerable  loans  ;  a 
portion  of  which  was  used  for  the  payment  of  interest  on  the 
certificates  of  indebtedness,  which,  had  now  been  issued  in 
considerable  amounts,  in  the  purchase  of  supplies  for  the 
army.  The  tariff  of  prices  was  suspended  ;  as  it  was  believed 
that,  throuo-h  the  aid  of  the  French  fleet,  the  foreiq:n  commerce 
of  the  country  would  revive,  and  that  means  for  the  future 
prosecution  of  the  war  could  be  provided  largely  by  loans. 
The  people  were  buoved  up  for  a  time  by  a  belief  that  the  war 
was  soon  to  be  brought  to  a  close.  Congress,  actuated  by  a 
similar  feeling,  made  little  or  no  attempt  for  the  restoration  of 
the  finances.  It  still  continued  to  meet  the  demands  that 
w^ere  constantly  made  upon  it  by  issues  of  notes  ;  which,  fi-om 
April  to  January,  1779,  equalled  850,500,000,  making  the  w^hole 
amount  outstanding  at  the  close  of  that  year  8101,500,000. 
At  that  time,  theu"  value  had  fallen  to  about  eight  to  one  of 
coin.  The  mihtary  operations  for  the  year  were,  on  the  whole, 
unfavorable.  The  French  fleet  came  too  late  in  the  season  to 
carry  out  those  which  had  been  planned  in  connection  wdth  it, 
and  the  w^ar  seemed  as  far  from  an  end  as  ever.  Despondency 
again  succeeded  to  the  hope  which  had  been  raised  so  high.^ 
Congress,  in  view  of  the  situation,  was  at  last  forced  to  act, 
wliich  it  did  by  the  appointment  of  a  Committee,  consisting  of 
Robert   Morris,    Elbridge    Gerry,   Richard    H.   Lee,    Francis 

1  The  following  letter  from  William  Hosmer  to  Governor  Trumbull  well 
illustrates  the  state  of  feeling  at  the  time  :  — 

"I  wish  I  could  with  truth  assure  your  excellencv  that,  in  mv  view,  our 
affairs  are  in  a  happv  train  ;  and  that  Congress  has  adopted  wise  and  effectual 
measures  to  restore  our  wounded  public  credit,  and  to  establish  the  United 
States,  their  liberty,  union,  and  happiness,  upon  a  solid  and  permanent  founda- 
tion. I  dare  not  do  it  while  my  heart  is  overwhelmed  with  the  most  melancholy 
presages.  The  idleness  and  captiousness  of  some  gentlemen,  maugre  the  wishes 
and  endeavors  of  an  honest  and  industrious  majority,  in  my  apprehension 
threaten  the  worst  consequences."  —  Letters  to  Washington,  vol.'ii.  p.  196. 


CURRENCY  OF  THE  REVOLUTION.  443 

Witlierspoon,  and  Gouverneur  Morris,  to  consider  the  finan- 
cial situation.  The  Committee  made  its  report  to  Congress  on 
the  lotli  of  September,  1778.  It  was  not,  however,  acted 
upon  till  the  8th  of  October  following. 

The  first  question  that  came  up  for  consideration  was  the 
recommendation  of  the  Committee  to  take  off  the  limitation 
of  the  price  of  gold  ;  that  is,  to  repeal  the  law  which  had 
attempted  to  make  the  notes  equal  in  value  to  a  corresponding 
amount  of  the  former.  They  had  now  become  so  depreciated 
that  the  absurdity  of  the  law  was  too  manifest  to  allow  it 
to  remain  on  the  statute-book.  The  recommendation  was 
adopted  ;  and  by  it  the  first  direct  blow  to  the  credit  of  the 
notes  was  dealt  by  the  very  party  issuing  them.  It  was  an 
acknowledgment  of  a  difference  in  value  between  them  and 
coin,  although  payable  in  coin  on  their  face.  The  whole 
question  of  their  value  was  now  opened  up  for  discussion.  If 
they  were  not  worth  their  face,  what  were  they  worth  ?  The 
people  at  once  saw  the  abyss  over  which  they  stood.  That 
which  they  had  acquired  with  so  much  labor  and  toil  might 
become  utterly  worthless.  It  was  charged  that  the  Act  meant, 
repudiation.  This  was  indignantly  denied.  Congress,  as 
usual,  protested  its  good  faith,  and  that  every  dollar  of  the 
notes  would  be  eventually  discharged.  The  time  in  which 
such  protests  and  assurances  could  have  much  effect  had  long 
since  passed.  The  notes,  however,  continued  to  be  issued  in 
greater  sums,  and  to  decline  more  rapidly  than  ever  in  value. 
That  they  did  not  go  at  once  out  of  circulation  was  due  to  the 
fact,  that  every  issue  served  to  pay  old  debts  at  a  reduced  cost 
to  the  debtor.  There  were  always  plenty  to  take  them,  pro- 
vided they  could  be  had  at  a  sufficient  discount.  Swindling  was 
at  once  reduced  to  a  system,  Congress  all  the  time  abetting  it, 
by  issues  which  were  always  put  upon  the  market,  each  at  a 
less  rate  than  the  previous  one.  All  could  run  into  debt,  with 
a  certainty  of  making  money  by  the  operation.^ 

1  The  following  quotation  from  Sparks'  "  Life  of  "Washington "  will  show 
the  use  made  of  the  notes,  as  well  as  what  the  latter  thought  of  it :  — 

"  When  tlie  army  was  at  Morristown,  a  man  of  respectable  standing  lived  in 
the  neighborhood,  who  was  assiduous  in  his  civilities  to  Washington,  which  were 
kindly  received  and  reciprocated.  Unluckily,  this  man  paid  his  debts  in  the  de- 
preciated currency.  Some  time  afterward,  he  called  at  headquarters,  and  was 
introduced  as  usual  to  the  General's  apartment,  where  he  was  then  conversing 
with  some  of  his  officers.     He  bestowed  very  little  attention  upon  the  visitor. 


444      CURRENCY   AND   BANKING  IN   THE   UNITED    STATES. 

Although  at  this  day  a  retrospect  would  seem  to  discover 
nothing  but  imbecility  and  folly  in  the  financial  operations 
of  the  Revolutionary  Government,  and  would  show  it  to  be 
chargeable  with  no  small  part  of  the  want  of  success  of  the 
military  operations  of  the  country,  and  the  impoverishment 
and  distress  which  followed,  it  was  not,  considering  its  organi- 
zation, properly  liable  to  any  such  censure.  It  was  simply  a 
government  upon  which  the  gravest  duties  were  imposed,  but 
which  was  wholly  without  the  power  for  their  execution.  Such 
a  government,  like  an  individual,  —  assuming  every  thing,  and 
capable  of  nothing,  —  speedily  falls  into  utter  contempt.  It 
could  represent  and  implore,  but  not  command.  It  derived 
its  power  from  thirteen  distinct  peoples,  all  foreign  to  and  jeal- 
ous of  each  other  ;  and  each  fearing  that  it  should  do  more 
than  its  share  in  the  struggle  in  which  all  were  engaged. 
Their  only  tie  was  hatred  of  the  common  enemy.  Apart 
from  this,  there  was  hardly  more  resemblance,  sympathy,  or 
cohesion  between  Massachusetts  and  Virginia —  the  two  leading 
States  in  the  contest  —  than  between  England  and  France. 
They  were  as  antagonistic  as  was  possible  for  two  States  hav- 
ing a  common  parentage.  It  was  a  common  parentage  which 
rendered  the  antagonism  between  them  all  the  more  irrecon- 
cilable. Had  they  not  belonged  to  the  same  race,  their  differ- 
ences would  have  been  held  to  be  constitutional,  and  therefore 
to  be  respected.  Where  the  difference  is  one  between  mem- 
bers of  the  same  race,  the  assumption  is  that  one  must  be 
wrong,  and  that  that  one  must  yield.  To  yield  may  be  to 
give  up  whatever  a  people  holds  most  dear.  Opinion,  where 
its  defeat  involves  such  consequence,  is  of  all  things  that  most 
worth  fighting  for.  The  history  of  this  country  is  the  history 
of  two  great  tendencies  which  are  as  old  as  humanity,  and 
which,  since  its  settlement,  have  divided  its  people  into  two 
hostile  camps,  —  that  which  seeks  to  subject  all,  high  and  low, 
to  the  restraints  of  a  common  rule  ;  and  that  which  refuses  such 
subjection.     It  is  the  difference  between  government  and  no 

The  same  thing  occurred  a  second  time,  when  he  was  more  reserved  than  before. 
Tiiis  was  so  ditt'erent  from  his  customary  manner  tliat  Lafayette,  who  was  pres- 
ent on  botli  occasions,  could  not  lieip  remarking  it ;  and  he  said,  after  the  man 
was  gone, '  General,  this  man  seems  to  be  much  devoted  to  you,  and  yet  you  have 
scarcely  noticed  him.'  Washington  replied,  smiling,  '  I  know  I  have  not  been 
cordial :  I  tried  hard  to  be  civil,  and  attempted  to  speak  to  him  two  or  three 
times;  but  that  Continental  money  stopped  my  mouth.' "  —  Life  and  Writings 
of  Washington,  vol.  i.  p.  333. 


CUEEENCY  OF  THE  REVOLUTION.  445 

government,  order  and  anarcli}^  progress  and  decay.  The 
North,  engaging  from  necessity  in  commerce  and  manufactures, 
sought  the  workl  for  a  market,  and  immunity  vherever  their  peo- 
ple or  products  could  go.  The  South,  devoted  to  agriculture, 
with  their  markets  mostly  in  Europe,  and  with  institutions 
founded  on  force,  would  take  counsel  only  of  their  necessities 
and  fears.  To  commit  themselves  to  the  guidance  of  ideas,  or  to 
the  people  of  the  North,  would  be  to  court  the  overthrow  of 
the  very  conditions  upon  which  all  their  prosperity  was  supposed 
to  rest.  The  history  of  this  country  is  but  a  history  of  the 
struggle  for  the  mastery  of  opposing  tendencies  and  ideas, 
growing  out  of  conditions  differing  radicall}'  in  kind.  Hence 
the  importance  of  studying  well  the  period  from  the  forma- 
tion of  the  Provisional  Government  in  1775  to  the  adop- 
tion of  the  Constitution  in  1788.  It  is  the  only  mode  by 
which  we  get  at  the  motives  that  led  to  the  formation  and 
adoption  of  the  Constitution,  and  the  different  constructions 
given  to  its  provisions.  The  great  question  then,  as  it  has 
ever  since  been,  was  whether  the  second  government  only 
repeated  the  loose  confederation  which  preceded  it,  —  a  gov- 
ernment without  purposes  or  powers ;  or  whether  it  was  an 
autonomy  within  itself,  paramount  to  all,  and  responsible  to 
nothing  but  its  own  will,  controlled  and  guided,  to  a  cer- 
tain extent,  by  that  provision  by  which  the  competency  of  its 
acts  was  to  be  decided  by  a  tribunal  provided  by  the  Constitu- 
tion itself.  That  instrument  was  but  the  result  of  the  reaction 
against  the  anarchy  and  barbarism  toward  which  the  country 
was  then  rapidly  tending.  He  who  did  the  most  to  secure  its 
adoption  understood  best  the  incompetency  and  worthlessness 
of  the  government  it  superseded.^ 

1  So  loose  were  the  ties  by  which  the  confederacy  was  bound  together,  so 
limited  was  the  control  exercised  by  Congress  over  the  States,  and  so  little  in- 
clined were  tlie  parts  to  unite  in  a  consolidated  whole,  that,  from  imbecility  on 
the  one  hand  and  public  apathy  on  the  other,  Washington  became  more  and 
more  fearful  of  the  consequences.  "The  great  business  of  war," said  he," can 
never  be  well  conducted,  if  it  be  conducted  at  all,  while  the  powers  of  Congress 
are  only  recommendatory.  While  one  State  yields  obedience,  and  another 
refuses  it,  while, a  third  mutilates  and  adopts  the  measure  in  part  only,  and  all 
vary  in  time  and  manner,  it  is  scarcely  possible  that  our  affairs  should  prosper, 
or  that  any  thing  but  disappointment  can  follow  the  best-concerted  plans.  The 
willing  States  are  almost  ruined  by  their  exertions  ;  distrust  and  jealousy  ensue. 
Hence  proceed  neglect  and  ill-timed  compliances  ;  one  State  waiting  to  see  what 
another  will  do.     This  thwarts  all  our  measures,  after  a  heavy  though  ineffectual 


446      CUERENCY  AKD   BANKING  IN  THE  UNITED    STATES. 

The  country  continuing  to  suffer  greatly  fi'om  the  spurious 
notes  put  upon  the  market,^  Congress  was  compelled  to  call 
in  those  issued  on  May  22,  1777,  and  April  11,  1778,  which 
had  been  more  extensively  counterfeited  than  any  others.  The 
order  for  calling  them  in  excited  great  complaints.  No  one 
would  take  them  in  trade,  as  the  government  was  not  immedi- 
ately prepared  to  issue  new  notes  for  the  old.  The  loss  and 
inconvenience  caused,  as  well  as  the  distress  prevailing  at  the 
time,  will  be  seen  by  the  following  letter,  preserved  in  the 
Pennsylvania  archives :  — 

"  How  comes  it  that  Congress,  by  their  resolve  relative  to  the 
two  emissions  of  May,  1777,  and  April,  1778,  have  set  the  country 
in  such  a  ferment,  and  given  room  for  a  set  of  speculating  people 
who  are  enemies  to  the  real  good  of  their  country  to  take  occasion 
from  it  to  depreciate  the  vahie  of  these  two  emissions  in  the 
manner  they  have  done,  and  are  now  daily  doing  ?  There  are  a  set 
of  them  here  very  busy  in  this  matter  ;  that  by  their  management 
within  this  day  or  two  it  is  rendered  twenty-five  per  cent  worse 
than  the  other  emissions  ;  which,  God  knows,  were  sunk  low  enough 
before.  Our  butchers,  bakers,  and  farmers  begin  to  refuse  it  en- 
tirely, OAving  to  the  stories  propagated  about  it.  Must  people  who 
have  this  money  either  lose  a  fourth  of  it  or  starve  ?  And  when 
the  time  comesfor  exchanging  it,  must  they  spend  half  the  value  of 
the  httle  they  have  in  taking  it  to  Philadelphia  to  place  it  in  the 
office  ?  and  after  that  wait  sixty  days,  and  attend  a  second  time 
for  payment?  Indeed,  I  think  the  resolve  is  not  one  of  the  wisest, 
and  wish  to  see  these  evils  speedily  remedied.  The  merchants,  or 
rather  hucksters,  of  Philadelphia  are  jjlaying  the  same  there. 
Surely  Congress  can  call  in  these  or  any  other  emissions  in  a 
manner  less  injurious  to  the  country.  I  am  so  angry  at  this  affivir 
that  I  hardly  know  what  I  write,  and  so  vexed  at  the  daily  schemes 

expense  is  incurred."  And  he  adds,  on  the  point  of  vesting  Congress  with  com- 
petent powers, "Our  independence,  our  respectability  and  consequence  in  Europe, 
our  greatness  as  a  nation  hereafter,  depend  upon  it.  The  fear  of  giving  suffi- 
cient powers  to  Congress,  for  tlie  purposes  I  have  mentioned,  is  futile.  A  nom- 
inal head,  which  at  present  is  but  another  name  for  Congress,  will  no  longer  do. 
That  honorable  body,  after  hearing  the  interests  and  views  of  the  several  States 
fairly  discussed  and  explained  by  their  representatives,  must  dictate,  and  not 
merely  recommend  and  leave  it  to  the  States  to  do  afterwards  as  they  please ; 
which,  as  I  have  observed  before,  is  in  many  cases  to  do  nothing  at  all."  —  Life 
and  Writings  of  Washington,  vol.  i.  pp.  349-350. 

1  Tlie  hopes  of  the  enemy  were  largely  fed  on  the  probable  failure  of  the 
Continental  currency.  General  McDougal,  writing  from  Peekskill  to  General 
Josepli  Reed,  says,  "  The  enemy  is  confident  our  currency  will  fail  us,  .  .  . 
and  that,  whenever  the  supplies  for  the  army  fail,  the  people  will  return  to  their 
allegiance.  He  is  now  counterfeiting  another  emission,  which  will  soon  be  out." 
—  Life  of  President  Reed,  vol.  ii.  p.  57. 


CTJEKEXCY   OF   THE   EEYOLUTION.  447 

for  depreciating  of  our  cnrrcncy,  that  I  sometimes  think  we  don't 
deserve  the  liberty  we  have  been  contending  for,  while  such  mis- 
creants are  suffered  to  breathe  among  us.  And,  indeed,  I  can't  help 
thinking  that  the  Congress's  own  servants,  such  as  quartermasters, 
commissaries  of  purchase,  &c,,  do  as  much  injury  to  it  as  any  other 
speculators  ;  for  the  more  they  lay  out  or  charge  for  articles  which 
themselves  have  engrossed,  the  more  are  their  commissions." 

The  following  letter,  written  from  Albany  to  the  "  Phila- 
delphia Packet,"  furnishes  another  illustration  of  the  manner 
in  which  the  assumed  "  hucksters  and  forestallers  "  were  dealt 
with :  — 

"  Last  week,  two  transgressors  Avho  sold  rum  for  more  than  the 
regulated  price  were  publicly  cried  through  the  city,  by  order  of 
the  committee,  as  having  incurred  the  just  indignation  of  the  peo- 
ple. The  inhabitants  ordered  them  immediately  to  appear  before 
them,  being  met  at  the  market-place  ;  where,  by  falling  on  their 
knees  on  a  scaffold,  they  acknowledged  themselves  guilty,  and 
promised  to  abide  by  and  assist  tlie  orders  of  the  committee :  upon 
which  they  were  discharged.  Hard  money  is  not  to  j^fiss  Jiere  any 
longer :  we  have  lately  hung  up  and  burned  in  effigy  a  dealer  in 
hard  money."  < 

One  of  the  greatest  alleged  grievances  during  the  war  was 
the  conduct  of  a  class  who  were  assumed  to  have  purchased 
merchandise  for  the  very  purpose  of  forestalling  the  market 
and  growing  rich  out  of  the  necessities  of  consumers.  They 
were  loaded  with  everj'-  opprobrious  epithet,  and  were  not 
unfrequently  thrown  into  prison  and  plundered  of  what- 
ever they  possessed.  With  a  currency  steadily  declining  in 
value,  all  holders  of  merchandise  appear  in  effect  to  be  fore- 
stallers, by  refusing  to  sell  except  at  an  advance  necessary  not 
only  to  meet  the  present,  but  the  future  decline,  likely  to  take 
place  before  they  can  use  the  monej^  they  receive.  They  must, 
in  addition  to  a  fair  profit,  charge  a  considerable  advance  to 
cover  the  risks  of  the  future.  What  with  them  is  only  an 
exercise  of  ordinary  prudence,  is  by  those  who  (from  a  con- 
stant decline  in  the  value  of  the  notes  they  hold)  suffer  a  heavy 
loss,  often  treated  as  a  conspiracy  to  defraud  and  injure  them, 
to  be  punished  by  the  severest  penalties.  With  the  public,  it 
is  always  that  prices  are  advanced,  not  that  the  money  has  de- 
clined in  value.  The  great  majority  of  holders  of  merchandise 
at  such  periods  have  not  only  no  design  to  defraud  or  oppress, 
but  would  gladly  sacrifice  all  profit  could  they  be  protected 


448      CUREENCY  AlS^D    BAISTKING   IN   THE   UNITED   STATES. 

against  loss.  It  is  impossible  that  it  should  be  otherwise  ;  for 
the  greatest  amount  of  profit,  in  the  long  run,  is  to  be  gained 
under  a  currency  uniform  in  volume  and  value.  The  manner 
in  which  this  class  are  often  treated  shows  how  completely  an 
irredeemable  currency  subverts  the  sense  of  those  using  it. 
Another  class,  who  are  real  oifenders,  but  who  often  escape  all 
annoyance  and  censure,  are  those  who  are  able  to  monopolize 
such  large  amounts  of  this  money  as  to  control  the  market  on 
a  grand  scale,  and,  by  alternately  raising  and  depressing  prices, 
often  make  a  profit  equal  to  the  degree  of  the  fluctuation  they 
can  cause.  A  legal-tender  currency  always  tends  to  flow  to 
the  great  centres  of  trade,  for  the  reason  that  it  cannot  dis- 
tribute itself,  like  gold,  or  be  absorbed  in  the  arts,  or  retired 
by  the  operations  of  production  and  trade.  It  is  always  upon 
the  market  in  full  volume,  its  amount  bearing  no  relation  to 
the  quantity  of  merchandise  to  be  moved  by  it.  It  is  wholly 
unlike  a  convertible  currency,  which  is  always  disappearing,  to 
reappear  only  to  symbolize  new  creations  of  merchandise. 
The  latter,  as  soon  as  it  has  served  its  purpose  by  reaching  for 
consumption  that  which  it  represents,  becomes  functus  officio. 
Such  a  currency,  consequently,  bears  an  exact  relation  to 
that  which  is  to  be  moved  by  it.  In  addition  to  the  monopoly 
of  money  which  a  government  currency  always  serves  to 
create,  those  who  hold  it  are  always  able  to  increase  or  dimin- 
ish its  purchasing  power,  by  increasing  or  diminishing  its 
apparent  value  ;  that  is,  the  credit  of  the  government  issuing  it. 
This  credit,  therefore,  becomes  at  once  the  great  object  of  attack 
by  a  large  and  powerful  class.  So  far  as  they  can  affect  its  value, 
it  is  the  same  as  if  they  could,  upon  the  occasion,  create  the 
instruments  by  which  is  to  be  measured  the  extent  or  quantity 
of  whatever  they  bu}^  or  sell.  The  credit  of  all  governments, 
and  with  it  the  prices  of  their  securities,  is  constantly  fluctuat- 
ing ;  but  none  so  much  so  as  that  of  governments  issuing 
legal-tender  notes,  as  these  are  regarded  as  the  last  resort  of 
incompetency  and  exhaustion.  The  credit  of  such  govern- 
ments, and  with  it  the  standards  of  value,  are  in  the  hands  of 
the  rich  and  unscrupulous ;  who,  as  far  as  its  subsistence  is 
concerned,  may  have  a  whole  community  in  their  power.  A 
legal-tender  currency,  therefore,  in  whatever  light  viewed,  is 
the  crowning  blunder  and  injustice  of  a  State.  It  corrupts 
the  morals  ;  arrays  class  against  class  ;  exposes  the  unoffending 


CUKRENCY  OF  THE  REVOLUTION.  449 

to  the  fury  of  merciless  mobs,  impelled  by  a  sense  of  wrong 
and  suffering,  the  cause  of  which  they  cannot  understand ; 
creates  the  most  odious  of  all  monopolies,  —  that  of  money ;  and 
saps  the  very  foundation  of  material  prosperity,  by  reducing  all 
industry  and  enterprise  to  the  mere  hazards  of  games  of  chance. 
It  tends  directly  to  reduce  society  to  a  condition  of  barbarism  ; 
for  the  reason  that,  from  the  want  of  an  accurate  measure  of 
value,  almost  every  act  becomes  more  or  less  tainted  with  in- 
justice and  fraud. 

At  the  close  of  1778,  the  total  amount  of  notes  authorized 
and  issued  equalled  $101,500,000 :  of  which  16,000,000  were 
authorized  in  1775 ;  $19,000,000,  in  1776  ;  $13,000,000,  in  1777 ; 
and  163,500,000,  in  1778.  Their  value  at  the  close  of  the  last 
year  was  reduced  to  about  eight  to  one  of  coin.  The  military 
operations  for  the  year  were  on  the  whole  unfavorable.  Great 
distrust  and  despondency  were  the  natural  results.  By  this 
time,  the  most  potent  enemy  with  which  the  nation  had  to 
contend  was  its  money.  Very  little  coin  was  in  circulation.  Its 
notes  were  the  common  measure  of  value,  —  a  measure  enor- 
mously depreciated,  and  never  two  days  the  same  ;  which  no 
honest  man  dared  trust  or  use  ;  but  which  could,  at  its  face, 
legally  discharge  debts  contracted  to  be  paid  in  coin.  No  won- 
der the  anarchy  and  distress  which  prevailed,  the  hand  of 
every  man  being  against  his  neighbor ;  or  the  impotence  of 
Government,  and  the  impossibility  of  carrying  out  any  plan 
of  operations  which  the  Commander-in-cliief  might  propose. 
Almost  every  thing  that  was  undertaken  came  to  nothing,  from 
the  lack  of  money  to  raise  and  pay  troops,  to  provide  military 
supplies  and  means  of  transportation.  In  vain  did  Congress 
invest  Washington  with  dictatorial  powers.  He  could  urge 
and  entreat  the  States  to  act ;  but  was  as  incapable  of  com- 
pelling obedience  as  was  Congress  itself.  The  soldiers,  whose 
pay  was  at  best  a  pittance,  saw  that  even  this  was  fast  losing 
all  its  value.  The  discontent,  occasioned  as  much  by  the  de- 
preciation of  what  they  held  as  by  the  non-payment  of  what 
was  due  them,  ended,  in  the  winter  of  1778-79,  in  a  mutiny  in 
the  army  stationed  at  Morristown,  which  at  one  time  threat- 
ened the  gravest  consequences.  These  were  only  averted  by 
the  address  and  influence  of  Washington.     While  the  army 

29 


450      CURRENCY   AND   BANKING   IN   THE   UNITED    STATES. 

was  unal^le,  for  want  of  means,  to  achieve  any  thing  worthy  of 
itself,  and  was  filled  with  discontent  bordering  upon  insubordi- 
nation, the  operations  of  commerce  and  trade  were  almost  com- 
pletely paralyzed.     Never  was  there  a  more  wretched  picture 
than  that  presented  by  the  United  States  for  the  four  years 
beginning  with  1776  and  ending  with  1779.     Any  one  reading 
this  sketch  may  well  wonder  that  the  cause  of  the  patriots  did 
not  utterly  fail.     One  reason  was  the  imbecility  and  incapac- 
ity with  which  it  was  opposed.     With  the  exception  of  Lord 
Cornwallis,  there  does  not  appear  to  have  been  a  single  officer 
high  in  command  in  the  British  army  possessing  any  capacity 
for  military  or  ci\dl  affairs.     Another  was  the  vast  extent  of 
country  to  be  overrun  and  occupied,  if  the  rebellion  were  to  be 
put  down.     Although  the  colonists  had  been  most  loyal  sub- 
jects of  the  crown,  such  was  the  injustice  with  which  they  were 
treated,  and  the  sufferings  they  had  endured,  that,  after  the 
war  had  been  waged  a  few  years,  no  concession  made  by  the 
Home  Government  could  ever  have  brought  them  back  to  their 
former  allegiance.     They  could  have  been  held  in  subjection 
only  by  an  armed  force  in  every  little  community,  far  beyond 
the  ability  of  the  enemy  to  maintain.     If  finally  worsted  in  the 
field,  great  numbers  would  have  taken  to  the  forests,  from 
which  they  would  have   carried  on  a  guerilla  warfare,  which 
would    never   have    allowed    him   to   be   weak   in   force    or 
off  his  guard.     It  is  well-known  that  it  was  the  purpose  of 
Wasliington,  had  the  final  result  been  against  him,  to  have 
crossed  the  Alleghanies  for  a  home  in  the  vast  solitudes  of  the 
Mississippi  Valley.     Another  reason  was  the  independent  con- 
dition of  the  people.     Nine  out  of  every  ten  were  cultivators 
of  the  soil.     Nearly  all  that  was  consumed  by  a  family  was 
produced  by  its  own  labor,  so  that  the  interruption  of  trade 
and  the  destruction  of  the  foreign  commerce  of  the   country 
did  not,  after  all,  weigh  so  heavily  upon  the  nation.     The 
accounts  that  we  get  of  the  time  come  from  the  cities,  the 
inhabitants  of  which,  chiefly  concerned  in  trade  and  manufac- 
tures, suffered  severely.     The  first  effect  of  the  government 
notes  was  to  create   a  general  inflation  in  prices  and  great 
activity  in  all  business  operations,  to  be  soon  followed  by  a 
correspondirg  depression  and  inactivity  ;  which,  as  their  cause 
was  not  understood,  produced  great  complaints,  without  lead- 


CUKRENCY  OF  THE  REVOLUTION.  451 

ing  to  the  adoption  of  any  remedy.  For  the  enemy  to  over- 
run the  country  was  a  mere  waste  of  time  and  means,  unless 
it  could  be  filled  with  troops,  for  which  all  that  England  could 
have  put  into  the  field  would  by  no  means  have  sufficed.  The 
Home  Government  wholly  misconceived  the  nature  of  the 
struggle  in  which  it  engaged,  and  the  extent  of  the  natural 
obstacles  opposed  to  its  arms,  which  were  more  formidable 
than  any  which  could  be  opposed  by  the  hand  of  man. 

The  financial  position  becoming  daily  more  and  more  criti- 
cal. Congress  resolved  to  reduce  the  amount  of  its  notes,  in 
order  to  raise  the  credit  of  those  outstanding.  On  the  1st  of 
January,  1779,  it  passed  a  resolution  calling  upon  the  States 
to  pay  in  $15,000,000  in  notes  for  the  current  year,  and 
86,000,000  a  year  for  the  next  eighteen  years.  It  also  declared, 
that  if  any  were  issued  in  the  year  ensuing,  they  should,  in  the 
manner  and  within  the  period  prescribed  for  the  other  notes,  be 
taken  in,  to  be  first  applied  to  the  pajTnent  of  interest ;  next, 
to  that  of  the  principal  of  the  loans  outstanding,  and  made 
prior  to  Jan.  1,  1780  ;  and  that  all  not  necessary  for  the  above 
purposes  were  to  be  destroyed.  It  was  hoped  that  such  meas- 
ures would  prevent  any  further  decline.  All  such  exjDedients 
proved  unavailing,  for  the  reason  that  no  one  supposed  the 
requisitions  would  be  complied  with.  The  notes  could  not  be 
got  in ;  and  Congress  was  compelled  to  make  further  issues, 
which  it  did  to  the  amount  of  $10,000,000  in  the  following 
month.  Matters  continued  to  go  rapidly  from  bad  to  worse. 
Early  in  May,  1779,  the  President  of  the  Council  for  Pennsyl- 
vania and  others  were  admitted  upon  the  floor  of  Congress,  to 
state  the  dilemma  in  which  they  were  placed,  and  solicit  its 
interposition  to  avert  a  popular  movement  which  was  appre- 
hended. A  meeting  of  the  citizens  of  Philadelphia  was  to  be 
held,  and  violence  was  feared  from  an  excited  and  suffering 
populace.  Congress  could  only  issue  one  of  its  manifestoes,  that 
the  country  had  been  forced  into  a  cruel  war,  that  it  had  re- 
sorted to  notes  as  its  only  resource,  that  ultimate  success  was 
certain,  that  all  its  obligations  would  be  faithfully  respected, 
that  the  great  cause  of  high  prices  was  the  conduct  of  fore- 
stallers  and  monopolizers,  and  that  these  must  be  looked  after 
and  severely  punished ;  all  to  end,  however,  with  a  further  issue 
of  notes.     The  Philadelphia  meeting  was  held,  and  resolved  :  — 


452      CURRENCY  AND   BANKING   IN   THE  UNITED   STATES. 

"  That,  whereas  prices  of  goods  and  provisions  have,  within  the 
last  six  months,  risen  to  an  enormous  height,  far  beyond  what  they 
ought  to  be  in  proportion  to  the  quantity  of  money ;  and,  whereas 
the  prices  of  rum,  sugar,  flour,  coffee,  and  tea  have  greatly  risen 
within  the  past  week,  without  any  real  or  apparent  cause :  and,  as  it 
is  our  determination  not  to  be  eaten  up  by  monopolizers  and  fore- 
stallers,  therefore  we  unconditionally  insist  and  demand  that  the 
advanced  or  monopolized  price  of  the  present  month  be  instantly 
taken  off,  and  that  prices  be  immediately  reduced  to  what  they 
were  on  the  first  day  of  May,  instant."  ^ 

Committees  of  safety  were  at  that  time  almost  supreme 
powers  in  the  land ;  and  one,  as  a  matter  of  course,  was  ap- 
pointed at  the  meeting  referred  to,  charged  with  full  authority 
to  carry  out  its  objects  ;  to  regulate  the  value  of  property,  of 
rentals,  of  labor,  and,  in  fact,  of  almost  every  act  of  society. 
The  people,  sensible  only  of  their  sufferings,  and  ignorant  of 
the  cause,  clamored  fiercely  for  a  reduction  in  the  price  of  food. 
Congress  promised  to  give  ear  to  their  complaints ;  but  con- 
stantly aggravated  them  by  new  issues  of  paper,  at  the  same 
time  urging  the  States  to  establish  tariffs  of  prices,  and  de- 
nouncing to  the  severest  punishments  all  who  should  violate 
them.  In  all  such  measures,  it  was  certain  to  have  the  sym- 
pathy of  the  great  mass  of  the  people,  who  still  believed  that 
prices  could  be  regulated  by  law.  In  illustration,  the  follow- 
ing extract  is  given,  from  a  communication  which  appeared 
at  the  time  in  the  "  Philadelphia  Packet :  "  — 

"  I  am  one  who  thinks,"  says  the  writer,  "  a  limitation  of  prices 
is  absolutely  necessary.  I  am  sure  every  man  must  wish  it  as  the 
only  means  to  get  rich.  We  have  all  been  wrong  in  our  notions  of 
getting  rich.  It  is  true  we  have  got  money.  I  have  more  money 
than  I  ever  had ;  but  I  am  poorer  than  I  ever  Avas.  I  had  money 
enough  some  time  ago  to  buy  a  hogshead  of  sugar.  I  sold  it  again, 
and  got  a  great  deal  more  money  for  it  than  what  it  cost  me ;  yet  what 
I  sold  it  for,  when  I  went  to  market  again,  would  buy  but  a  tierce. 

1  What  some  of  these  prices  were  on  the  first  day  of  May  will  be  seen  by 
the  following  statement :  — 

West  India  Rum,  per  gallon £6  15s. 

Country  „       „        „  5    0 

Brandy  „        „  7    0 

Tea,  per  pound        4  10 

Salt,  per  bushel        10    0 

riour,  per  cwt 20    0 

Molasses,  per  gallon 4  12 


CURRENCY  OF  THE  REVOLUTION.  453 

I  sold  that  tierce  for  a  great  deal  of  profit ;  yet  the  whole  of  what  I 
gold  it  for  would  afterwards  buy  but  a  barrel.  I  have  now  more 
money  than  ever  I  had ;  yet  I  am  not  so  rich  as  when  I  had  less. 
This  is  what  I  have  experienced  myself ;  and  I  believe  every  man 
in  town  and  country  feels  the  same.  I  am  sure  we  shall  all  grow 
poorer  and  poorer,  unless  we  all  fall  on  some  method  to  lower 
our  prices ;  and  then  the  money  we  have  to  spare  will  be  worth 
something.  I  am  glad  to  see  the  affair  begun  upon.  May  God 
give  it  success ;  and  let  all  the  people  say  Amex." 

Among  the  expedients  resorted  to  at  the  time,  for  the  purpose 
of  maintaining  the  value  of  paper  money,  were  associations 
organized  for  the  purpose  of  driving  hard  money  out  of  cir- 
culation, in  the  hope  that,  by  confining  all  the  operations  of 
society  to  paper  money,  its  decline,  at  least,  could  be  prevented. 
The  following  copy  of  a  handbill  placarded  at  the  time  in 
Boston  will  give  a  good  idea  of  the  mode  by  which  such  a 
result  was  sought  to  be  accomplished :  — 

"  Sons  of  Boston  !        Sleep  no  Longer  ! 

"  Wednesday,  June  16,  1779. 

"You  are  requested  to  meet  on  the  floor  of  the  Old  South 
Meeting-House  to-morrow  morning,  at  9  o'clock,  at  which  time  the 
bells  will  ring. 

"  Rouse  and  catch  the  Philadelphia  spirit ;  rid  the  community  of 
those  monopolizers  and  extortioners,  who,  like  canker-worms,  are 
gnawing  upon  your  vitals.  They  are  reducing  the  currency  to 
waste  paper,  by  refusing  to  take  it  for  many  articles.  The  infection 
is  dangerous.  We  have  borne  with  such  wretches  ;  but  will  bear 
no  longer.  Public  examples  at  this  time  Avould  be  public  benefits. 
You,  then,  that  have  articles  to  sell,  lower  your  prices ;  you  that 
have  houses  to  let,  refuse  not  the  currency  for  rent ;  for,  inspired 
with  the  spirit  of  those  heroes  and  patriots  who  have  struggled 
and  bled  for  their  country,  and  moved  with  the  cries  and  distresses 
of  the  widow,  the  orphan,  and  the  necessitous,  Boston  shall  no 
lono-er  be  your  place  of  security.  Ye  inhabitants  of  Nantucket, 
who  first  introduced  the  accursed  crime  of  refusing  paper  money, 
quit  the  place,  or  destruction  shall  attend  your  property,  and  your 
persons  be  the  object  of 

"  vengeance. 

"  N.  B.  Lawyers,  keep  yourselves  to  yourselves. 
"  It  is  our  determination  to  support  the  reputable  merchant  and 
fair  trader  " 


454      CUKEENCY   AND    BANKING   IN   THE   UNITED   STATES. 

Congress,  still  having  little  other  resource  than  its  notes,  con- 
tinued their  issue  on  a  larger  scale  than  ever,  to  meet  their  more 
rapid  and  excessive  decline.  On  the  26th  of  August,  the 
amount  issued  equalled  1161,500,000.  Of  tliissum,  ^100,000,000 
had  been  issued  during  the  year.  The  value  was  then  reduced 
to  eighteen  for  one.  Congress  still  attempted  to  arrest  a 
further  decline,  by  an  addi-ess  in  which  it  promised,  "  if  pos- 
sible," not  to  exceed  the  amount  already  outstanding;  and  to 
inspire  confidence  by  the  method  so  often  resorted  to  in  similar 
cases,  of  depreciating  the  magnitude  of  present  burdens  by 
showing  the  vastly  increased  number  of  shoulders  upon  which 
they  must  soon  rest ;  for,  peace  established,  crowds  of  emigrants 
would  flee  from  oppressed  Europe  to  this  land  of  liberty.  A 
country  so  rich  by  nature,  and  soon  to  be  so  populous,  could 
easily  bear  all  the  burdens  likely  to  be  imposed  upon  her  by 
the  war :  — 

"  Let  us  sxappose,"  it  said,  "  for  the  sake  of  argument,  that  at  the 
conclusion  of  the  war  the  emissions  should  amount  to  $200,000,000  ; 
that,  exclusive  of  supplies  from  taxes,  which  will  not  be  inconsider- 
able,  the  loans  should  amount  to  $100,000,000,— then  the  whole 
national  debt  of  the  United  States  would  be  $300,000,000.     There 
are  at  present  3,000,000  of    inhabitants   in   the   thirteen    States; 
$300,000,000,  divided  among  3,000,000  of  people,  wouM   give  to 
each  person  $100 ;  and  is  there  an  individual  in  America  unable,  in 
the  course  of  eighteen  or  twenty  years,  to  pay  it  again  ?     Suppose 
the  whole  debt  assessed,  as  it  ought  to  be,  on  the  inhabitants  in 
proportion  to  their  respective   estates,  what   would    then  be  the 
share  of  the  poorer  people?     Perhaps  not  $10.     Besides,  as  this 
debt  will  not  be  payable  immediately,  but  probably  twenty  years 
allotted  for  it,  the  number  of  inhabitants  by  that  time  in  America 
will  be  far  more  than   double   their  present  amount.     It  is  well 
known  that  the  inhabitants  of  this  country  increased  almost  in  the 
ratio  of  compound  interest.     By  natural  population  they  doubled 
almost  every  twenty  years,  and  how  great  may  be  the  liost  of 
emigrants  from  other  countries  cannot  be  asceitained.     We  have 
the  highest  reason  to  believe  the  number  will  be  immense.     Suppose 
that  only  ten  thousand  should  arrive  the  first  year  after  the  war, 
what  will  those  ten  thousand,  with  their  families,  count  in  twenty 
years  time?      Probably  double  the  number.       This    observation 
applies  with  proportionable  force  to  the  emigrants  of  every  suc- 
cessive year.     Thus  you  see  a  great  part  of  your  debt  will  be  pay- 
able, not  merely  by  the  present  number  of  inhabitants,  but  by  that 
number   swelled   and   increased  by  the  natural  population  of  the 
present  inhabitants,  by  multitudes  of  emigrants  daily  arriving  from 
other  countries,  and  by  the  natural  population  of   those  succes* 


CURRENCY   OF   THE   REVOLUTION.  455 

sive  emigrants ;  so  that  every  person's  share  of  the  debt  will  be 
constantly  diminishing  by  others  coming  in  to  pay  a  proportion 
of  it."  1 

The  injustice  of  being  compelled  to  accept  the  government 
notes  in  the  payment  of  debts  previously  contracted  had  now 
become  so  great  as  to  be  no  longer  tolerated.  Even  Washing- 
ton would  no  longer  receive  them  in  the  payment  of  old  debts, 
but  at  their  value.  In  a  letter  to  the  manager  of  his  estate, 
Lund  Washington,  written  under  date  of  the  17th  of  August, 
1779,  he  said :  — 

"  Some  time  ago  you  applied  to  me  to  know  if  you  should  receive 

payment  of  General  M 's  bonds,  and  of  the  bond  due  from  the 

deceased  Mr.  M 's  estate  to  me  ;  and  you  were,  after  animadvert- 
ing a  little  upon  the  subject,  authorized  to  do  so.  Of  course,!  pre- 
sume the  money  has  been  received.  I  have  since  considered  the 
matter  in  every  point  of  view  in  which  my  judgment  enables  me 
to  place  it ;  and  am  resolved  to  receive  no  more  old  debts  (such,  I 
mean,  as  were  contracted  and  ought  to  have  been  paid  before  the 
war)  at  the  present  nominal  value  of  the  money,  unless  compelled 
to  do  it,  or  it  is  the  practice  of  others  to  do  it.     Neither  justice, 

1  The  amount  of  the  public  debt  incurred  in  the  prosecution  of  the  war,  in 
addition  to  that  incurred  by  the  several  States,  was  given  in  the  address  from 
which  the  preceding  extract  was  made,  as  follows  :  — 

Notes  issued $159,948,880 

Money  borrowed  in  France 7,545,196 

Money  borrowed  at  home,  for  which  govern- 
ment certificates  were  chiefly  given      .     .  26,188,909 

Money  borrowed  in  Europe,  and  not  yet  re- 
ceived      4,000,000 

Total $197,682,985 

At  that  time  the  whole  amount  received  from  taxation,  through  requisitions 
upon  the  States,  amounted  only  to  §3,027,560.  The  wliole  amount  supplied  by 
tlie  people  up  to  the  date  of  the  address,  other  than  that  furnished  on  the  notes, 
equalled  $29,216,469.  The  domestic  debt  was  chiefly  in  the  form  of  certificates, 
or  acknowledgments  of  the  government  of  supplies  furnished  it,  which  were 
given  largely  by  commissaries  in  payment  of  articles  seized  by  them,  and 
represented  the  estimated  value  of  such  as  were  taken. 

The  following  statement  of  expenditures  of  the  government  for  1778,  and  the 
proportions  of  paper  and  metalUc  money  used,  will  show  the  extremities  to 
which  it  was  reduced :  — 

Notes §62,156,842 

Specie 78,666 

Livres 28,525 

The  amount  of  specie  amidst  such  a  vast  mass  of  paper  was  very  like  the 
wit  of  Gratiano  in  the  play. 


456      CUEEEXCY   A2sD   EAXKTS'G   EST   THE   UNITED    STATES. 

reason,  nor  policy  requires  it.  The  law,  undoubtedly,  was  well 
designed.  It  was  intended  to  stamp  a  value  upon,  and  to  give  a 
free^circulation  to,  the  paper  bills  of  credit ;  but  it  never  was  nor 
could  have  been  intended  to  make  a  man  take  a  shilling  or  sixpence 
in  the  pound  for  a  just  debt  which  his  debtor  is  well  able  to  pay, 
and  thereby  involve  himself  in  ruin.  I  am  as  willing  now  as  I  ever 
was  to  take  paper  money  for  every  kind  of  debt,  and  at  its  present 
depreciated  value  for  those  debts  which  have  been  contracted  since 
the  money  became  so ;  but  I  will  not  in  future  receive  the  nominal 
sum  for  such  old  debts  as  come  under  the  above  description,  except 
as  before  specified.  Xo  man  has  gone,  and  no  man  will  go,  further 
to  serve  the  republic  than  myself.  If  sacrificing  my  whole  estate 
would  effect  any  valuable  purpose,  I  would  not  hesitate  one  moment 
in  doing  it ;  but  my  submitting  in  matters  of  this  kind,  unless  the 
same  is  done  by  others,  is  no  more  than  a  drop  in  the  bucket."  ^ 

And  in  a  letter  of  the  22d  August,  to  the  President  of 
Congress,  Mr.  Reed,  he  says  :  — 

"  The  sponge,  which  you  say  some  gentlemen  have  talked  of 
using,  unless  there  can  be  a  di<5crimination  and  proper  saving 
clauses  provided  (and  how  far  this  is  practicable  I  know  not), 
would  be  unjust  and  impolitic  in  the  extreme.  Perhaps  I  don't 
understand  what  they  mean  by  using  the  sponge.  If  it  be  to  sink 
the  money  in  the  hands  of  the  holders  of  it,  and  at  their  loss,  it 
cannot  in  my  opinion  stand  justified  upon  any  principles  of  com- 
mon policy,  common  sense,  or  common  honesty.  But  how  far  a 
man,  for  instance,  who  had  possessed  himself  of  twenty  paper  dol- 
lars by  means  of  one  or  the  value  of  one  in  specie,  has  a  just  claim 
upon  the  public  for  more  than  one  of  the  latter  in  redemption,  and  in 
that  ratio  according  to  the  periods  of  depreciation,  I  leave  to  those 
who  are  better  acquainted  with  the  nature  of  the  subject,  and  have 
more  leisure  than  I  have,  to  discuss."  ^ 

The  solution  of  this  matter  had  now  come  to  transcend  the 
forecast  of  even  Washington  himself.  He  would  not  repudiate 
the  notes  ;  but,  certainly,  a  person  who  had  contracted  to  pay 
$10  in  coin,  had  no  right  to  discharge  the  debt  by  a  note  which 
cost  him  only  $1  in  coin  ;  nor  had  the  holder  of  a  note  for  $10, 
which  cost  him  only  $1,  a  right  to  be  paid  its  full  amount.  No 
solution  was,  in  fact,  possible  ;  for  matters  had  now  reached  such 
a  pass  that  the  proper  one  was  to  let  the  money  die  in  the 
hands  of  its  holders.  Less  suffering  and  less  injustice  would 
result  from  this  mode  of  disposing  of  the  problem,  than  any 
other.     Justice  could  never  have  been  done  by  any  attempts 

1  Life  and  Writings  of  "Washington,  vol.  vl.  p.  321. 
■•i  Ibid.  p.  a32. 


CUEEENCY  OF  THE  EEVOLUTIOK. 


457 


to  take  in  the  money  at  any  equitable  scale.  If  it  were  to  be 
taken  in,  it  could  onl}'  be  done  by  raising  the  necessary  amount 
by  a  tax,  which  would  have  to  be  assessed  somewhat  in  ratio 
to  the  amount  held  by  each.  To  retire  it,  therefore,  by  tax- 
ation or  payment  would  be  to  employ  a  useless  machinery  to 
accomplish  that  which  could  be  better  accomplished,  with  the 
same  justice,  by  really  doing  nothing. 


As  no  argument  urged  by  Congress  had  any  effect  whatever 
in  raising  the  value  of  its  notes,  its  only  course  was  to  make 
the  most  of  its  power  of  issue  while  any  thing  could  be  had 
for  them.  The  amount  issued  between  Aug.  26  and  Nov. 
29,  1779,  the  date  of  the  last  one,  equalled  $40,000,000 ;  the 
total  amount  up  to  the  last  date  being  $241,552,280.^  At 
the  close  of  the  year,  the  notes  had  fallen  to  about  forty 
for  one  of  coin.  With  such  a  depreciation,  any  further  issue 
would  have  been  regarded  as  too  absurd  to  be  attempted. 
Congress,  however,  was  by  no  means  at  the  end  of  its  expedi- 
ents. On  the  18th  of  March,  1781,  it  issued  an  address,  which, 
after  reciting  the  necessities  which  had  driven  it  to  the  issue 
of  a  large  amount  of  notes,  and  their  great  decline  in  value, 
declared  it  to  be  expedient  to  reduce  the  amount  outstanding : 
and  for  that  pui'pose  it  made  a  requisition  upon  the  States  for 
$15,000,000  of  notes  per  month,  to  continue  up  to  April,  1781 ; 

1  Statement  showing  the  dates  of  issue,  and  amounts  of  Continental  money 
issued,  during  the  War  of  Independence  :  — 


Dates  authorizing 

Amounts 

Dates  authorizing 

Amounts 

issues. 

authorized. 

issues. 

authorized. 

1775 

June  22d 

$2,000,000 

Amount  brought  forward 

$61,500,000 

July  25th 

1,000,000 

1778     July  30th 

5,000,000 

91 

Nov.  29th 

3,000,000 

„       Sept.  5th 

5,000,000 

1776 

Feb.  17th 

4,000,000 

„          „      2tith      .     .     .     . 

10,000,000 

May  9th  and  27th   .     . 

5,000,000 

„       Nov.  4th 

10,000,000 

July  22d  and  Aug.  13th 

5,000,000 

„       Dec.  14th 

10.000,000 

91 

Nov.  2d  and  Dec.  28th 

5,000,000 

1779    Feb.  3d 

5,000,160 

1777 

Feb.  2Gth 

5,000,000 

„         „     19th   

5,000,160 

May  20th 

5,000,000 

„       April  1st 

5,000,160 

Aug.  15th       .... 

1,000,000 

.,       May  5th 

10,000,100 

f  1 

Nov.  7th 

1,000,000 

„       Jan.  4th  and  Mav  7th  . 

50,000.100 

1) 

Dec.  3d 

1,000,000 

,,       June  4th 

10,000,100 

1778 

Jan.  8th 

1,000,000 

,,       July  17th 

5,000,180 

}) 

„     22d 

2,000,000 

n             i»        )t         

10,000,100 

1, 

Feb.  16th 

2,000,000 

,,       Sept.  17th       .     .     .     . 

5,000,180 

March  5th       .... 

2,000,000 

10,000,180 

April  4th 

1,000,000 

„       Oct.  14th 

5,000,180 

„    nth 

5,000,000 

„       Nov.  17th 

5,000,040 

„     18th 

500,000 

5,050,500 

May22d 

5,000,000 

„       Nov.  29th 

10,000,140 

June  20th       .... 

5,000,000 

J 

Vmount  carried  forward 

61,500,000 

Total 

$241,552,280 

458      CI7EKENCY    AJN'D   BANKING   IN  THE  UNITED   STATES. 

and  that  the  amounts  so  taken  in  were  to  be  cancelled,  except 
those  issued  the  preceding  January  and  February,  which  would 
be  necessary  for  the  operations  of  government.  In  lieu,  how- 
ever, of  the  payment  of  notes,  gold  and  silver  were  receivable 
in  pajTnent  of  such  requisitions,  at  the  rate  of  81  for  $40  of 
paper.  As  fast  as  the  notes  were  brought  in  and  cancelled, 
new  notes  were  to  be  issued,  at  the  rate  of  $1  to  120  taken  in, 
redeemable  in  specie  in  six  years  ;  and  to  bear  interest  at  the 
rate  of  5  per  cent  per  annum,  also  payable  in  specie  at  the 
redemption  of  the  notes,  or  annually,  at  the  election  of 
the  holder :  the  notes  to  be  issued  on  the  funds  or  secui-ity  of 
the  several  States ;  for  the  payment  of  which,  however,  the 
faith  of  the  United  States  was  to  be  pledged.  Of  such  notes, 
six-tenths  were  to  go  to  the  States,  and  four-tenths  to  the 
United  States,  to  be  credited  to  the  States  on  whose  funds  or 
security  they  were  issued ;  the  new  notes  to  be  receivable  in 
payment  of  the  monthly  quotas,  at  the  same  rate  as  specie. 
These  notes,  however,  were  no  better  received  than  the  old 
ones  ;  nor  does  it  appear  that  any  considerable  amounts  of  them 
ever  got  into  circulation.^  The  public  had  so  often  been  deceived 
and  imposed  upon  that  it  turned  a  deaf  ear  to  all  propositions 
of  the  kind.  The  days  of  the  Continental  paper  money,  in 
whatever  form  issued,  were  numbered.  Congress  did  not 
attempt  to  press  the  circulation  of  its  new  notes.     While  the 

1  "Our  new  paper  money,"  says  Josiah  Quincy  in  a  letter  to  Washington, 
"  issued  by  recommendation  of  Congress,  no  sooner  began  to  circulate  tlian  two 
dollars  of  it  were  given  for  one  hard  one  (that  is  the  rate  of  the  old).  To  re- 
store the  credit  of  the  paper  by  making  it  a  legal  tender,  by  regulating  acts  or 
by  taxes,  are  political  manoeuvres  that  have  already  proved  abortive  ;  and  for 
this  obvious  reason,  that,  in  the  same  proportion  as  ideal  money  is  forced  into 
currency,  it  must,  from  the  nature  of  every  thing  fraudulent,  be  forced  out  of 
credit.  I  am  firmly  of  the  opinion,  and  think  it  entirely  defensible,  that  there 
never  was  a  paper  pound,  a  paper  dollar,  or  a  paper  promise  of  any  kind,  that 
ever  yet  obtained  a  general  currency  but  by  force  or  fraud,  —  generally  by 
both."  —  Letters  to  Washington,  vol.  iii.  p.  157. 

"  The  people  of  the  States  at  that  time  had  been  so  worried  and  fretted, 
disappointed  and  put  out  of  humor,  by  so  many  tender-acts,  limitations  of  prices, 
and  other  compulsory  methods  to  force  value  into  paper  money,  and  compel  the 
circulation  of  it ;  and  by  so  many  vain  funding  schemes,  declarations,  and 
promises,  all  of  which  issued  from  Congress,  but  died  under  the  most  zealous 
efforts  to  put  them  into  operation  and  effect,  —  that  their  patience  was  all  ex- 
hausted. I  say,  these  irritations  and  disappointments  had  so  destroyed  the  courage 
and  confidence  of  these  people,  that  they  appeared  heartless  and  almost  stupid 
when  their  attention  was  called  to  any  new  proposition."  —  Webster's  Essays, 
p.  116. 


CURRENCY  OF  THE  REVOLUTION.  459 

old  steadily  declined  in  value,  they  were  actively  dealt  in,  till 
their  price  fell  so  low  that  even  their  holders  had  no  interest  in 
seeking  to  dispose  of  them.  Their  activity,  even  when  they 
fell  as  low  as  500  to  1,  excited  the  wonder  of  writers  at  the 
time.  There  always  appeared  to  be  a  plenty  of  parties  ready 
to  take  them,  till  they  fell  below  this  rate,  against  the  chance 
that  some  provision  might  be  made  for  their  ultimate  redemp- 
tion. 

The  cessation  of  issue  was  a  practical  demonetization  of  the 
Continental  paper,  although,  for  some  time  thereafter,  it 
remained  on  the  statute  books,  not  only  of  Congress  but  of 
the  several  States,  as  lawful  money.  Early  in  1781,  however, 
the  former  recommended  the  total  repeal  of  all  laws  making 
its  notes  money.  The  States,  one  after  another,  adopted  the 
recommendation.  Xo  sooner,  however,  had  it  been  seen  that 
the  notes,  from  their  worthlessness,  were  to  go  out  of  circula- 
tion, than  the  people  began  to  take  measures  to  provide  them- 
selv^es  with  a  currency  of  coin.  The  process  was  so  noiseless 
and  natural  as  to  attract  no  attention  whatever.  Metallic 
money  seemed  to  be  improvised  by  the  necessity  for  its  use. 
All  that  was  wanting  was  to  leave  the  people  free  to  act  solely 
with  a  view  to  their  own  welfare.  It  is  with  money  as  with 
every  other  help  by  which  the  operations  of  society  are  carried 
on.  It  may  be  that  the  best  cannot  be  immediately  had  ;  but 
it  will  always  be  sought  until  it  is  secured.  Its  realization 
wUl  be  free  from  disturbance  in  ratio  as  the  people  are  eman- 
cipated from  the  control  of  government.  No  sooner  had  the 
occasion  or  necessity  arisen  for  it,  than  coin  appeared.  Large 
amounts  were  brought  into  the  country  from  the  subsistence 
and  payment  of  the  British  troops.  The  foreign  loans  were 
paid  in  coin.  Considerable  amounts  of  silver  were,  during  the 
war,  constantly  received  from  Spain  and  Mexico,  through 
Havana.  From  the  beginning  of  1780,  hard  money,  as  it 
was  termed,  began  to  show  itself  in  large  amounts.  Indeed, 
from  that  time  there  appears  to  have  been  no  lack  of  specie  in 
the  country.  "  Gold  and  silver,"  says"  Paine,^  "  that  for  a 
while  seemed  to  have  retreated  again  into  the  bowels  of  the 
earth,  have  once  more  risen  into  circulation,  and  every  day 
adds  a  new  strength  to  trade,  commerce,  and  agricidture." 

1  The  Crisis,  p.  209. 


460      CUERENCY   AND   BANKING   IN   THE   UNITED   STATES. 

It  was  not  possible  but  that  the  effect  of  the  government  notes 
should,  during  the  whole  period  of  their  use,  have  been  most 
mischievous.  For  the  little  time  their  credit  was  maintained, 
they  relieved  Government  of  a  duty  which  should  have  been 
assumed  at  the  very  outset,  of  providing,  in  some  adequate 
manner,  for  the  expenses  of  the  war.  It  would  have  been  far 
easier  to  have  done  this  in  1775,  before  the  notes  were  issued, 
than  in  1780,  after  they  ceased  to  be  available.  It  was  inevita- 
ble that  the  time  should  come  in  which  they  would  be  no  longer 
used,  from  the  total  discredit  of  the  government,  —  caused, 
in  great  measure,  by  their  use.  The  testimony  of  contempo- 
raneous writers,  as  to  the  baleful  influence  they  exerted  over 
the  moral  and  material  welfare  of  the  people,  is  as  emphatic  as 
it  is  unanimous.  Ramsay,  in  his  "  History  of  the  War  of  the 
Revolution,"  in  wliich  he  was  actively  engaged,  says  of  it:  — 

"  The  aged  who  had  retired  from  the  scenes  of  active  business  to 
enjoy  the  fruits  of  their  industry  found  their  substance  melting 
away  to  a  mere  pittance,  insufficient  for  their  support.  The  widow 
who  lived  comfortably  on  the  bequests  of  a  deceased  husband 
experienced  a  frustration  of  all  his  well-meant  tenderness.  The 
laws  of  the  country  interposed,  and  compelled  her  to  receive  a 
shilling  where  a  pound  was  her  due.  The  blooming  virgin  who 
had  grown  up  with  an  unquestionable  title  to  her  patrimony  was 
legally  stripped  of  every  thing  but  her  personal  charms  and  virtues. 
The  hapless  orphan,  instead  of  receiving  from  the  hands  of  an 
executor  a  competency  to  set  out  in  business,  was  obliged  to  give  a 
final  discharge  on  the  payment  of  &d.  on  the  pound.  In  many 
instances,  the  earnings  of  a  long  life  of  care  and  diligence  were, 
in  the  space  of  a  few  years,  reduced  to  a  trifling  sum.  .  .  . 
That  the  helpless  part  of  the  community  were  legislatively 
deprived  of  their  property  was  among  the  lesser  evils  which 
resulted  from  the  legal  tender  of  the  depreciated  bills  of  credit : 
the  iniquity  of  the  laws  estranged  the  minds  of  many  of  the  citi- 
zens from  the  habits  and  love  of  justice.  The  nature  of  obligations 
was  so  far  changed  that  he  was  reckoned  the  honest  man  who, 
from  princi])le,  delayed  to  pay  his  debts.  The  mounds  which 
government  had  erected  to  secure  the  observance  of  honesty  in 
the  commercial  intercourse  of  man  with  man  were  broken  down. 
Truth,  honor,  a?id  Justice  were  sicept  away  by  the  overflowing 
deluge  of  legal  iniquity ;  nor  have  they  yet  assumed  their  ancient 
and  accustomed  seats."  ^ 

The  testimony  of  another  contemporaneous  writer  and  accu- 
rate observer  is  equally  to  the  point :  — 

1  History  of  the  American  Revolution,  vol.  ii.  p.  134  et  seq. 


CURRENCY  OF  THE  REVOLUTIOX.  461 

"  It  has,"  said  Pelatiah  Webster,  a  most  trustworthy  authority, 
"  polluted  the  equity  of  our  laws,  turned  them  into  engines  of 
oppression  and  wrong;  corrupted  the  justice  of  our  public  admin- 
istrations; destroyed  the  fortunes  of  thousands  who  had  the  most 
confidence  in  it;  enervated  the  trade,  husbandry,  and  manufactures 
of  the  country ;  and  went  far  to  destroy  the  morality  of  our  peo- 
ple."^ "We  have  suffered  more,"  says  Webster,  in  another  place, 
"from  this  cause  than  from  any  other  cause  or  calamity.  It  has 
killed  more  men,  pervaded  and  corrupted  the  choicest  interests  of 
our  country  more,  and  done  more  injustice,  than  even  the  arms  and 
artifice  of  the  enemy."  "  Old  debts,"  says  another,  "  were  paid  when 
paper  money  was  more  than  seventy  for  one.  Brothers  defrauded 
brothers,  children  parents,  and  parents  children.  Widows,  orphans, 
and  others  were  paid  for  money  lent  in  specie  with  depreciated 
paper,  which  they  were  compelled  to  receive.  A  person  who  had 
been  supplied  with  specie  in  the  jail  of  Philadelphia  while  the 
British  were  in  possession  of  that  city  repaid  it  in  paper  at  a  tenth 
pai't  of  its  value."  ■^  "  That  the  army,"  said  Josiah  Quincy,  in  a  letter 
to  Washington,  "  has  been  grossly  cheated  ;  that  creditors  have  been 
infamously  defrauded  ;  that  the  widow  and  the  fatherless  have 
been  oppressively  wronged  and  beggared  ;  that  the  gray  hairs  of 
the  aged  and  the  innocent,  for  want  of  their  just  dues,  have  gone 
down  with  sorrow  to  their  graves,  in  consequence  of  our  disgrace- 
ful, depreciated  paper  currency  —  may  now  be  affirmed  without 
hazard  of  refutation  ;  and  I  wish  it  could  be  said  with  truth  that 
the  war  has  not  thereby  been  protracted.  May  it  not,  therefore, 
be  safely  concluded,  that  no  kind  of  paper  currency  is  adequate  to 
the  purpose  of  collecting  and  combining  the  forces  of  these  United 
States  for  their  common  defence?"^ 

As  no  notes  were  issued  after  1779,  Congress  thereafter  had 
to  sustain  itself,  as  best  it  could,  by  loans,  by  purchases  made 
in  exchange  for  its  certificates,  by  seizures  by  commissaries, 
and  by  aid  of  moneys  and  troops  raised  by  the  States.  The 
■war  dragged  along  through  1780,  without  any  decisive  ad- 
vantage on  either  side.  Its  prolongation,  however,  tended  to 
exhaust  the  enemy  more  than  the  people  of  the  States.  Early 
in  1781,  Louis  XVI.  presented  Congress  with  6,000,000  livres. 
A  loan  to  the  amount  of  10,000,000  livres  was  also  obtained 
from  the  French  government.  Before  these  could  be  made  avail- 
able, Congress  was  reduced  to  the  greatest  straits.  Early  in 
1781,  a  very  important  step  was  taken  toward  reorganizing 
and  systematizing  the  finances  of  the  country,  by  the  creation 
of  the  office  of  Financier-General,  to  which  Robert  Morris  was 

i  Webster's  Essays,  p.  174. 

2  Breck. 

3  Letters  to  Washington,  vol.  iii.  p.  157. 


462      CURREXCY   AND   BAISTKESTG   IN   THE   UNITED    STATES. 

appointed.  He  brought  to  his  position  great  capacity,  great 
industry,  untiring  devotion  to  the  cause ;  and,  as  he  was  pos- 
sessed of  large  means,  he  often  raised  upon  his  own  credit 
considerable  sums  to  meet  pressing'  emergencies. 

Had  such  an  office  been  erected  at  the  outset,  and  Mr. 
Morris,  or  some  equally  competent  person,  been  appointed  to 
it,  the  war  might  have  been  brought  to  a  close  in  a  compara- 
tively short  time,  instead  of  dragging  (as  it  did)  through  eight 
weary  years.  The  government  by  which  it  was  waged  had 
neither  an  executive,  nor  departments,  nor  control  over  the 
revenues  of  the  country.  Perhaps  no  better  one  was  possible 
at  the  time.  So  intense  were  the  local  jealousies,  so  different 
the  institutions,  pursuits,  habits,  and  ideas  of  the  various  sec- 
tions, and  so  firmly  were  they  wedded  to  their  local  govern- 
ments, —  that  years  of  anarchy  and  suffering  were  still  neces- 
sary to  teach  the  necessity  of,  and  reconcile  them  to,  one  of 
paramount  authority,  if  they  would  escape  the  barbarism  to 
which  the  nation  was  already  rapidly  tending. 

Among  the  expedients  devised  in  1780  for  the  support  of 
the  war  was  a  voluntary  association  of  citizens  of  Philadelphia, 
formed  on  the  17th  of  June  of  that  year,  for  the  purpose  of 
opening  a  "security  subscription  to  the  amount  of  £300,000, 
Pennsylvania  currency,  in  real  money,"  to  be  expended,  or  the 
greater  portion  of  it,  in  sending  three  million  of  rations,  and 
three  hundred  hogsheads  of  rum,  to  the  army,  then  reduced  to 
the  greatest  distress  for  the  want  of  food  and  clothing.  The 
organization  was  termed  a  "  Bank."  Congress  warmly  seconded 
the  movement,  and  appointed  a  Committee  to  confer  with  those 
having  it  in  charge.  The  Committee  made  their  report  on  the 
21st  of  June,  and,  on  the  same  day.  Congress  resolved  that:  — 

"  Whereas,  a  number  of  the  patriotic  citizens  of  Pennsylvania  have 
communicated  to  Congress  a  liberal  offer  on  their  own  credit,  and 
by  their  own  exertions,  to  supply  and  transport  three  millions  of 
rations  and  three  hundred  ho<rsheads  of  rum,  for  the  use  of  the 
army,  and  have  established  a  Bank  for  the  sole  purpose  of  obtain- 
ing and  transporting  the  said  supplies  with  greater  iidelity  and 
dispatch  ;  and  xchereas,  on  the  one  hand,  the  associators  animated 
to  this  laudable  exertion  by  a  desire  to  relieve  the  public  necessi- 
ties mean  not  to  derive  from  it  the  least  pecuniary  advantage,  so, 
on  the  other,  it  is  just  and  reasonable  that  they  should  be  fully 
reimbursed  and  indemnified  : 

Resolved^  That  the  Board  of  Treasury  be  directed  to  deposit  in 


CURRENCY  OF  THE  REVOLUTION.  463 

the  said  Bank  bills  of  exchange  in  favor  of  the  directors  thereof, 
on  the  ministers  of  these  United  States  in  Europe,  or  any  of  them, 
and  in  such  sums  as  shall  be  thought  convenient,  but  not  to  exceed,  in 
the  whole,  £150,000  sterling  ;  that  the  said  bills  are  to  be  considei-ed 
not  only  as  a  support  of  the  credit  of  the  said  Bank,  but  as  an  indem- 
nity to  the  subscribers  for  all  deficiencies,  losses,  and  expenses  which 
they  may  sustain  on  account  of  their  said  engagements,  and  which 
shall  not,  within  six  months  from  the  date  thereof,  be  made  good 
to  them  out  of  the  jjublic  treasury." 

So  valuable  was  the  aid  furnished  by  the  "  Bank,"  that  Mr. 
Morris  determined  to  secure  for  it  a  legal  organization,  and 
applied  to  Congress  therefor.^  The  application  was  referred 
to  a  committee,  consisting  of  Messrs.  Clymer,  Smith,  Sullivan, 
and  Witherspoon,  who  reported  favorably  thereon  ;  and  Con- 
gress, on  the  26th  of  May,  1781,  resolved  that :  — 

"  Congress  do  approve  of  the  plan  for  establishing  a  National 
Bank,  in  these  United  States,  submitted  to  their  consideration  by 

1  "  One  of  the  first  acts  of  the  Superintendent  of  Finance  was  to  propose  the 
plan  of  a  Bank,  wliicli  was  incorporated  b}"^  Congress  under  tlie  name  of  the 
Bank  of  North  America.  Mr.  Gouverneur  Morris  says,  in  a  letter  to  a  friend, 
written  not  long  before  his  death,  '  The  first  Bank  in  this  country  was  planned 
by  your  humble  servant.'  By  this  he  probably  meant  tliat  he  drew  up  the  plan 
of  the  Bank,  and  the  observations  accompanying  it,  whicli  were  presented  to 
Congress,  and  not  that  he,  individually,  originated  the  scheme.  This  was  doubtless 
matured  in  conjunction  with  the  superintendent.  A  warm  friendship  had  sub- 
sisted between  them  for  some  time,  which,  it  may  be  presumed,  was  increased  by 
a  similarity  in  their  turn  of  mind  for  financial  pursuits.  To  Hamilton,  also, 
may  properly  be  ascribed  a  portion  of  the  merit  in  forming  this  Bank.  About 
two  weeks  before  the  plan  was  sent  to  Congress,  Hamilton  wrote  a  letter  to 
Robert  Morris,  enclosing  an  elaborate  project  for  a  Bank.  In  a  letter  acknowl- 
edging the  reception  of  this  paper,  the  financier  speaks  of  it  with  commendation. 
He  says,  'I  have  read  your  performance  with  that  attention  which  it  justly 
deserves ;  and,  finding  many  parts  of  it  to  coincide  with  my  own  opinions  on  the 
subject,  it  naturally  strengthened  that  confidence  which  every  man  ought  to 
possess,  to  a  certain  degree,  in  his  own  judgment.'  He  then  tells  him  that  he 
shall  communicate  it  to  the  Directors  of  the  Bank,  to  aid  them  in  their  delibera- 
tion on  certain  points,  which  it  was  not  thought  expedient  to  embrace  in  the 
plan  itself,  —  particularly  that  of  interweaving  a  security  with  the  capital. 

"  This  Bank  had  an  extraordinary  effect  in  restoring  public  and  private  credit 
in  the  country,  and  was  of  immense  utility  in  aiding  the  future  operations  of  the 
financier,  although  it  was  begun  with  tiie  small  capital  of  SWO.OOO.  Hamilton's 
project  contemplated  a  vastly  larger  sum,  in  which  Mr.  Morris  agreed  with  him  : 
but  its  immediate  success  on  so  large  a  scale  was  doubtful,  and,  if  it  failed  in  the 
outset,  it  could  not  be  revived ;  whereas,  by  beginning  with  a  small  capital,  and 
establishing  a  credit  with  the  public  gradually,  it  would  be  easy  afterwards 
to  increase  the  amount,  and,  in  the  end,  all  needful  advantages  might  be  derived, 
to  the  utmost  extent  of  banking  facilities."  —  Sparks'  Life  of  Gouverneur  Morris, 
vol.  i.  p.  325. 


464      CURRENCY  AND   BANKING   IN   THE   UNITED   STATES. 

R  Morris,  on  the  17th  May,  1781 ;  and  that  they  will  promote  and 
support  the  same,  by  such  ways  and  means  from  time  to  time  as 
may  appear  necessary  for  the  institution,  and  consistent  with  the 
pubHc  good. 

"  That  the  subscribers  to  the  said  Bank  shall  be  incorporated, 
agreeably  to  the  principles  and  terms  of  the  plan,  under  the  name 
of  the  '  President,  Directors,  and  Company  of  the  Bank  of  North 
America,'  so  soon  as  the  subscription  shall  be  filled,  the  Directors 
and  President  chosen,  and  application  for  that  purpose  made  to 
Congress  by  the  President  and  Directors  elected." 

The  plan  of  organization  having  been  matured,  Congress, 
on  the  31st  of  December,  1781,  granted  to  the  association  an 
Act  incorporating  them  under  the  name  of  the  "  Bank  of  North 
America."  The  Act  conferred  the  usual  and  proper  powers, 
and  named  the  first  Board  of  Directors  and  their  President. 
It  provided  that  the  share  capital  might  equal  $10,000,000. 
The  amount,  however,  with  which  the  bank  was  to  begin 
operations  was  fixed  at  $400,000.  Of  this  sum.  Congress 
agreed  to  subscribe  $250,000.  It,  however,  found  itself  able 
to  pay  in  but  150,000.  The  citizens  of  Philadelphia  subscribed 
$85,000.  The  balance,  $265,000,  was  furnished  from  abroad,  — 
chiefly  from  Holland.  The  Bank  opened  its  doors  for  business 
on  the  7th  of  January,  1782.  Accompanying  the  Act  of  In- 
corporation was  a  resolution  of  Congress  recommending  to  the 
State  Legislatures  to  pass  such  laws  as  might  be  necessary  to 
give  effect  to  its  Act.  Such  recommendation,  and  its  adoption 
by  most,  if  not  all  the  States,  affords  a  striking  illustration  of 
the  idea  wh^ch  prevailed  as  to  the  limited  powers  and  func- 
tions of  the  Central  Government.  Its  constituents  were  the 
States,  not  the  people ;  and  for  every  Act  of  the  kind  it  was 
deemed  necessary  to  ask  their  concurrence,  in  order  to  give  it 
the  force  and  validity  of  a  law  of  the  land.^ 

The  Act  incorporating  the  Bank  was  an  event  of  first-rate 
importance  in  the  history  of  the  country.  It  was  the  first  ade- 
quate attempt  of  the  kind  to  symbolize  its  merchandise,  so 

1  Much  valuable  information  for  this  account  of  the  paper  money  of  the 
Revolution  has  been  obtained  from  Mr.  Henry  Phillips'  "  Historical  Sketches 
of  American  Paper  Money."  In  addition  to  this,  he  has  published  several 
sketches  in  relation  to  the  paper  currencies  of  the  different  States.  They  are 
all  painstaking  and  creditable  works,  and  contrast  most  favorably  with  the  loose 
and  slipshod  manner  in  which  books  upon  tliis  and  kindred  subjects  are  usually 
made  in  this  country. 


I 


CUBEENCY  OF  THE  REVOLUTION.  465 

that  it  could  be  made  available,  and  transferred  from  hand  to 
hand,  without  the  interposition  of  coin.  As  proof  of  what  was 
gained,  the  Bank,  within  six  months  after  its  organization, 
loaned  1400,000  to  Congress,  and  180,000  to  the  State  of 
Pennsylvania.  What  Congress  chiefly  wanted  was  food  and 
clothing  for  the  army.  Had  it  been  possessed  of  coin,  it  would 
have  expended  it  in  their  purchase.  If  such  articles  could  be 
had  by  means  of  the  notes  of  the  Bank,  these  were  equally 
serviceable  with  coin.  All  that  a  person  possessed  of  merchan- 
dise, and  who  wished  to  render  it  available  to  government, 
had  to  do,  was  to  lend  to  the  latter  the  proceeds  of  the  dis- 
count of  the  bills  taken  in  its  sale.  These  would  be  returned 
to  the  Bank  in  payment  of  the  bills  discounted.  The  operation 
would  be  the  same  as  that  which  has  been  so  often  described. 
In  this  way,  the  means  of  a  government  may  be  increased  in 
ratio  to  the  whole  amount  of  those  of  its  people,  not  absolutely 
necessary  to  their  subsistence.  In  order  to  avail  itself  of  such 
merchandise  it  need  not  be  possessed  of  a  dollar  in  coin.  All  the 
coin  necessary  for  a  Bank  to  maintain  would  be  that  required 
to  make  good  its  losses.  With  coin  to  the  amount  of  $100,000, 
it  may  safely  put  in  circulation  notes  equalling  ten  times  that 
amount.  In  no  other  way  than  by  the  use  of  Banks  has  it 
been  found  possible  to  supply,  on  a  sufficient  scale,  adequate 
instruments  of  distribution  in  the  place  of  coin,  which,  so  long 
as  they  serve  as  such,  may  be  properly  termed  "  money."  The 
difference  to  a  country,  therefore,  between  a  symbolic  currency 
and  the  lack  of  it,  may  be  a  difference  in  its  available  means, 
equal,  or  nearly  equal,  to  the  whole  amount  of  its  merchan- 
dise proper  to  be  symbolized.  Added  to  the  positive  gain  is 
that  resulting  from  the  greater  convenience  of  the  use  of  a 
currency  of  sjanbols  over  one  of  coin. 

No  sooner  was  peace  established,  and  the  people  relieved 
from  the  pressure  of  a  necessity  which,  while  it  lasted,  gave 
to  the  country  a  semblance  at  least  of  unity,  than  Congress 
lost  even  the  little  respect  and  authority  it  had  once  enjoj^ed. 
With  peace  came  duties  graver  and  more  difficult  to  discharge 
than  those  imposed  by  the  war.  Provision  was  to  be  made  for 
carrying  out  the  treaty  with  Great  Britain,  for  opening  rela- 
tions with  other  powers,  establishing  internal  order,  and  ad- 
justing, and  if  possible  discharging,  the  enormous  debts  that 

30 


466      CURRENCY   AND   BANKING  IN   THE   IjrNITED   STATES. 

had  been  contracted.  The  terms  of  the  treaty  were  not  carried 
out :  internal  order  was  disturbed :  no  adequate  provision  was 
made  for  the  discharge  of  interest  on  the  domestic  or  foreign 
loans.  Local  jealousies  and  rivalries  began  to  manifest  them- 
selves on  every  hand.  The  revenues,  if  any  were  to  be  raised, 
were  to  come  from  imposts  on  foreign  merchandise.  Each 
State  sought  to  increase  its  own  importance  by  regulations 
which  should  attract  the  commerce  of  the  country  to  its  own 
ports.  In  place  of  being  united  against  a  common  enemy, 
each  State  threatened  to  become  the  enemy  of  all  others.  All 
that  had  been  won  with  so  much  blood  and  treasure  seemed  in 
danger  of  being  wholly  lost.  The  condition  of  things  is  well 
described  in  a  letter  from  General  Washington  to  Mr.  Jay, 
under  date  of  Aug.  1,  1786  :  — 

"  Your  sentiments,  that  our  affairs  are  drawing  rapidly  to  a  crisis, 
accord  Avith  my  own.  What  the  event  will  be  is  also  beyond  the 
reach  of  my  foresight.  We  have  errors  to  correct.  We  have 
probably  had  too  good  an  opinion  of  human  nature  in  forming  our 
confederation.  Experience  has  taught  us  that  men  will  not  adopt 
and  carry  into  execution  measures  the  best  calculated  for  their  own 
good,  without  the  intervention  of  a  coercive  power.  I  do  not  con- 
ceive we  can  exist  long  as  a  nation  without  having  lodged  some- 
where a  power  that  will  pervade  the  whole  Union  in  as  energetic 
a  manner  as  the  authority  of  the  State  governments  extends  over 
the  several  States.  To  be  fearful  of  investing  Congress,  constituted 
as  that  body  is,  with  ample  authorities  for  national  purposes,  appears 
to  me  the  very  climax  of  popular  absurdity  and  madness.  Could 
Congress  exert  them  for  the  detriment  of  the  public,  without  injur- 
ing themselves  in  an  equal  or  greater  proportion  ?  Are  not  their 
interests  inseparably  connected  with  those  of  their  constituents? 
By  the  rotation  of  appointment,  must  they  not  mingle  frequently 
with  the  mass  of  citizens  ?  Is  it  not  rather  to  be  apprehended,  if 
they  were  possessed  of  the  powers  before  described,  that  the  indi- 
vidual members  would  be  induced  to  use  them,  on  many  occasions, 
very  timidly  and  inefficaciously,  for  fear  of  losing  their  popularity 
and  future  election  ?  We  must  take  human  nature  as  we  find  it. 
Perfection  falls  not  to  the  share  of  mortals.  Many  are  of  opinion 
that  Congress  have  too  frequently  made  use  of  the  humble,  sup- 
pliant, tone  of  requisition  in  applications  to  the  States,  when  they 
had  a  right  to  assert  their  imperial  dignity  and  command  obedience. 
Be  that  as  it  may,  requisitions  are  a  perfect  nullity  where  thirteen 
sovereign,  independent,  disunited  States  are  in  the  habit  of  discussing 
and  refusing  compliance  with  them,  at  their  option.  Requisitions 
are  actually  little  better  than  a  jest  and  a  byword  through  the  land. 
If  you  tell  the  legislatures  they  have  violated  the  treaty  of  peace, 
and  invaded  the  prerogatives  of  the  confederacy,  they  will  laugh  in 


rORMATIOlSr  OF   THE  NEW   GOYEENifENT.  467 

your  face.  What,  then,  is  to  be  done  ?  Things  cannot  go  on  in  the 
same  train  for  ever.  It  is  much  to  be  feared,  as  you  observe,  that 
the  better  kind  of  peoj)le,  being  disgusted  with  the  circumstances, 
will  have  their  minds  prepared  for  any  revolution  whatever.  We 
are  apt  to  run  from  one  extreme  to  another.  To  anticipate  and 
prevent  disastrous  contingencies  would  be  the  part  of  wisdom  and 
patriotism. 

"  What  astonishing  changes  a  few  years  are  capable  of  producing ! 
I  am  told,  that  even  respectable  characters  speak  of  a  monarchical 
form  of  government  M^ithout  horror.  From  thinking  proceeds 
speaking  ;  thence  to  acting  is  but  a  single  step,  —  but  irrevocable 
and  tremendous  !  What  a  triumph  for  the  advocates  of  despotism, 
to  find  that  we  are  incapable  of  governing  ourselves,  and  that  systems 
founded  on  the  basis  of  equal  liberty  are  merely  ideal  and  fallacious  ! 
Would  to  God  that  wise  measures  may  be  taken  in  time  to  avert 
the  consequences  we  have  but  too  much  reason  to  apprehend !  "  ^ 

From  the  condition  of  anarchy  so  graphically  and  feelingly 
described,  the  nation  was  rescued  by  the  genius  and  patriot- 
ism of  Washington,  Hamilton,  Madison,  Franklin,  Jay,  and  a 
few  other  exalted  natures,  in  the  formation  of  the  Federal 
Government.  This  was  a  task  far  more  formidable  and  difficult 
than  the  severance  of  the  political  relations  which  had  bound 
the  colonists  to  the  mother  country.  That  was  one  which 
might  have  been  accomplished,  had  the  people  been  wholly 
incapable  of  political  organization  and  subjection  to  one  com- 
mon rule.  The  Mexican  and  South  American  colonies  were 
able  to  defy  the  utmost  power  of  Spain.  Acquiring  political 
independence,  they  have  never  been  able  to  establish  social 
order,  or  to  form  themselves  into  any  thing  deserving  the  name 
of  a  State. 

There  can  be  no  doubt  that  the  Constitution  of  the  United 
States  was  a  conception  far  in  ad^^ance  of  the  ideas  and  sen- 
timents prevailing  at  the  time  of  its  adoption,  and  that  it 
was  carried  by  personal  influence,  rather  than  from  any  well- 
grounded  conviction  of  the  people  in  its  favor.  All  had  im- 
plicit faith  in  the  great  chieftain  who  had  brought  the  war  to  a 
triumphant  conclusion,  and  whose  moral  and  civic  qualities, 
displayed  during  its  prosecution,  had  excited  still  greater  admi- 
ration than  his  military  achievements.  If  he  would  again  lead, 
the  people  would  again  commit  their  cause  and  their  w^elfare 
wholly  to  his  keeping.  But  for  his  transcendent  influence  the 
adoption  of  the  Constitution,  which  he  contributed  so  largely 

1  Life  and  Writings  of  Washington,  vol.  vi.  p.  187. 


468      CURRENCY  AND   BANKING  IN  THE  UNITED   STATES. 

to  frame,  could  not  have  been  secured.  It  was  natural  that 
most  of  the  leading  actors  in  the  War  of  the  Revolution  should 
be  advocates  of  a  strong  government,  from  an  experience  of 
the  limited  powers  and  imbecility  of  the  old.  The  notable 
exceptions  were  Patrick  Henry  and  Samuel  Adams.  Jefferson, 
its  great  future  enemy,  was,  fortunately,  out  of  the  country  at 
the  time.  The  same  good  fortune  that  placed  Washington  in 
command  of  the  armies  of  the  Revolution  committed  the  new 
government  to  the  guidance  of  his  matchless  wisdom  and 
prudence,  till  it  had  in  a  measure  become  consolidated ;  till 
sufficient  time  had  elapsed  to  illustrate  its  advantages,  and  to 
secure  to  it  the  confidence  and  affection  of  the  people,  before 
it  passed  into  the  hands  of  others  less  firm,  patriotic  and 
sagacious.  The  strength  it  acquired  under  his  administration 
enabled  it  to  meet  and  overcome  the  shocks  to  which  it  was 
exposed,  till  the  maturing  and  widening  of  the  wholly  irrecon- 
cilable tendencies  existing  at  the  time,  and  which  were  the 
great  obstacles  to  its  formation,  left  no  other  solution  but  the 
final  arbitrament  of  the  sword. 

The  government  formed,  Mr.  Hamilton  was  placed  in  charge 
of  the  Department  of  the  Treasury,  —  the  one  upon  which,  of 
all  others,  was  imposed  the  burden  of  restoring  the  financial 
and  material  condition  of  the  country,  reduced  to  its  lowest  ebb 
by  the  late  war,  and  the  disturbances  and  distrust  which  fol- 
lowed. Whether  or  not  he  had  a  consciousness  of  his  great 
mission,  he  could  not  have  been  actuated  by  broader  views,  or 
have  taken  measures  better  adapted  to  lay  fii-m  the  foundations 
of  a  great  empire,  —  the  greatest,  should  it  continue  another 
hundred  years,  that  the  world  has  yet  seen.  He  saw  what  all 
such  men  see,  that,  to  use  the  words  of  Washington,  "  influ- 
ence is  not  government,"  and  that  no  nation  can  become  truly 
great  that  is  not  possessed  of  powers  capable  of  subordinating 
all  conflicting  and  refractory  elements  to  the  authority  of  a 
common  rule.  Political  unity  is  a  product  of  conditions  either 
natural  or  enforced.  When  enforced,  its  achievement  is  the 
crowning  work  of  the  statesman. 

The  first  step  to  be  taken  w^s  a  recognition  and  payment, 
as  far  as  possible,  by  the  new  government,  of  the  debts  con- 
tracted in  the  late  war.  Hamilton  would  have  the  new  State 
signalize  its  beginning  by  an  act  of  justice,  which  should  not 


1 


CREATIOl^  OF  THE   UNITED   STATES   BAXK.  469 

onl}'  stand  as  a  guarantee  and  promise  of  the  future,  but  secure 
for  it,  at  the  very  outset,  an  honorable  place  among  the  nations. 
He  well  understood  that  private,  cannot  long  survive  the  neglect 
or  decay  of  public  morals ;  and  he  determined  to  re-enforce  the 
former  by  a  scrupulous  observance  of  the  latter.  The  debt 
adjusted  upon  an  equitable  basis,  the  next  step  was  provision 
for  the  payment  of  its  annual  charge,  as  well  as  the  current 
expenses  of  the  government.  These  were  provided  for  by 
imposts  upon  foreign  merchandise,  as  the  most  efficient,  and 
the  least  oppressive  and  expensive  mode ;  and  as  affording  at 
the  same  time  encouragement  and  protection  to  domestic 
industries.  His  third  great  measure  was  the  provision,  by 
means  of  a  Bank,  of  a  symbolic  currency  alike  adapted  to  the 
wants  of  the  government  and  of  the  people. ^ 

All  these  measures  excited  great  opposition.  That  which 
was  the  chief  object  of  attack  was  the  Bank.  For  its  creation 
the  Constitution  contained  no  provision  in  terms.  The  au- 
thority to  charter  it  was  derived  from  that  clause  which  gave 
Congress  "  the  power  to  pass  all  laws  necessary  and  proper  to 
carry  into  execution  the  preceding  powers."  It  was  assumed 
that  the  Bank  was  "  necessary  and  proper  "  for  the  execution 
of  "  the  power  to  levy  and  collect  taxes,  and  pay  the  debts, 
and  provide  for  the  common  defence  and  general  welfare." 
Mr.  Hamilton,  in  his  argument  in  support  of  its  constitution- 
ality, maintained  that  "  every  power  vested  in  a  government  is 
in  its  nature  sovereign  ;  and  includes,  by  force  of  the  term, 
a  right  to  employ  all  the  means  requisite  and  fairly  applicable 
to  the  attainment  of  the  ends  of  such  power,  and  which  are 

1  The  debt  of  the  old  government,  assumed  by  the  new,  equalled  $72,775,895, 
as  follows  :  — 

Foreign  debt $12,556,874 

Domestic  debt 40,256,802 

Debt  of  the  States  assumed 19,962,219 

Total $72,775,895 

The  foreign  debt  was  paid  in  full ;  so  was  the  domestic  debt,  for  which  an 
equivalent  was  received,  or  was  assumed  to  have  been  received.  The  claims  of 
the  States  for  advances  made  on  account  of  the  war,  were  adjusted  upon  what 
was  assumed  to  be  an  equitable  basis.  The  Continental  money  was  "cut  off 
with  a  shilling."  No  person  desired  its  recognition.  To  show,  however,  that  it 
was  not  forgotten,  it  was  allowed  to  be  funded  at  the  rate  of  100  to  1.  Of  the 
whole  amount,  it  appears  that  the  holders  of  §168,280,219  took  advantage  of  the 
provision  for  funding  it,  receiving  therefor  §1,082,802. 


470      CUEEENCY  AND  BANKING  IN  THE  UNITED   STATES. 

not  precluded  by  restrictions  and  exceptions  specified  in  the 
Constitution,  or  not  immoral,  or  not  contrary  to  the  essential 
ends  of  political  society  ;  "  and  that  the  Bank  was  one  of  the 
means  that  might  be  properly  employed  to  such  ends.  Mr. 
Jefferson,  in  opposition,  maintained  that  "  the  Constitution 
allows  only  the  means  wliich  are  '  necessary,'  not  those  which 
are  merely  convenient  for  effecting  the  enumerated  powers. 
If  such  a  latitude  of  construction  be  allowed  to  this  phrase, 
'  the  power  to  make  all  laws  necessary  and  proper  for 
carrying  into  execution  the  enumerated  powers,'  as  to  give 
any  non-enumerated  power,  it  will  go  to  every  one  ;  for  there 
is  no  one  which  ingenuity  may  not  torture  into  a  convenience 
in  some  way  or  other  to  some  one  of  the  long  list  of  enumer- 
ated powers :  it  would  swallow  up  all  the  delegated  powers, 
and  reduce  the  whole  to  one  phrase,  as  before  observed. 
Therefore  it  was  that  the  Constitution  restrained  Congress  to 
the  necessary  means ;  that  is  to  say,  to  those  means  without 
which  the  grant  of  the  power  would  be  nugatory." 

Such  were  the  opposing  constructions  as  to  the  nature  and 
effect  of  its  organic  law  upon  which  have  turned,  through  its 
whole  career,  the  legislation  and  history  of  the  nation.  Their 
authors  stood  as  types  of  American  ideas  and  life.  Whatever 
followed,  and  a  library  would  hardly  suffice  to  hold  all  that 
has  been  written  on  one  side  or  the  other  of  this  question,  has 
been  but  an  elaboration  and  application  of  their  respective 
arguments  or  positions,  which  are  sufficiently  stated  in  the 
preceding  brief  paragraph.  Their  different  constructions  grew 
out  of  differences  radical  in  kind.  There  is  no  record  of  the 
division  in  the  Senate  upon  the  passage  of  the  bill  creating  the 
Bank;  but  in  the  House  only  one  member  from  the  North 
voted  against  the  bill,  and  only  six  from  the  South  in  its  favor. 
The  members  of  the  Cabinet,  as  well  as  Congress,  were  divided 
geographically :  Mr.  Jefferson,  Secretary  of  State,  and  Mr. 
Randolph,  Attorney-General,  both  from  Virginia,  giving 
opinions  adverse  to  the  constitutionality  of  the  proposed  meas- 
ure ;  and  Mr.  Hamilton  of  New  York,  Secretary  of  the  Treas- 
ury, and  Mr.  Knox  of  Massachusetts,  Secretary  of  War,  giving 
opinions  in  its  favor.  General  Washington,  after  having  given 
the  subject  the  most  careful  consideration,  signed  the  bill. 


EISE  OF  POLITICAL  PARTIES  m  THE  UNITED   STATES.     471 

The  formation  of  the  Constitution  was  nothing  less,  in  fact, 
than  an  unsuccessful  attempt  to  fuse  into  one  two  distinct 
nations.  The  result  has  demonstrated  the  utter  impossibility 
of  such  an  attempt,  without  some  more  potent  force  than  com- 
mercial considerations,  or  legal  enactments  or  ties.  All 
sagacious  men  at  the  time  recognized  the  magnitude  of  the 
refractory  element,  —  Slavery  ;  but  all,  at  the  North  at  least, 
confidently  looked  for  its  disappearance  through  the  operation 
of  moral  and  industrial  causes.  The  result  showed  how 
greatly  they  were  mistaken.  They  forgot  that  slavery  was 
not  permeable  or  subject  to  the  influences  upon  which  they 
counted  so  much.  The  North,  addicted  to  commerce  and 
manufactures,  welcomed  all  the  helps  that  government  could 
bestow.  They  saw  in  a  Bank  a  useful  instrument  in  facilitat- 
ing its  operations,  in  alleviating  its  burdens,  and  at  the  same 
time  one  that  would  greatly  promote  individual  welfare.  To 
such  a  people,  Hamilton's  construction  appeared  wholly  reason- 
able. They  were  willing  to  make  convenience  law,  and  to 
commit  themselves  to  the  guidance  of  ideas,  no  matter  the 
conclusions  to  which  they  might  lead.  The  South  could  take 
nothing  on  trust.  Every  thing  must  be  determined  and  settled 
at  the  start.  To  commit  themselves  to  the  guidance  of  ideas 
might  be  to  court  the  overthrow  of  the  very  institutions 
upon  which  their  welfare  was  assumed  to  rest.  Slavery  was 
forbidden  by  public  as  well  as  by  moral  law.  A  conven- 
ient or  liberal  construction  might  question  its  propriety, 
restrain  it  within  its  original  limits,  or,  without  any  aggres- 
sive act,  render  its  continuance  impossible.  Hence  the 
necessity  of  a  "  strict  construction,"  not  only  where  slavery 
was  directly  concerned,  but  upon  ever}^  subject  touching  the 
material  welfare  of  the  nation.  The  South  could  derive  no 
advantage  from  the  adoption  of  measures  "  tending  to  promote 
the  general  welfare."  Such  measures  were  those  designed  for 
the  encouragement  of  domestic  industries  and  trade.  Their 
policy  was  to  blindfold  labor,  as  a  means  of  keeping  it  con- 
tented, or  in  ignorance  of  its  lot.  With  them,  the  encourage- 
ment of  the  industries  of  the  nation  meant  an  increase  of  the 
preponderance  of  their  rivals ;  which,  as  soon  as  it  gained 
sufficient  strength,  might  turn  upon  and  crush  thera.  The 
necessities  of  the  South  made  them  good  seers  of  the  final 
catastrophe  of  1860,  of  the  possibihty  of  which  they  never 
lost  sight. 


472      CUERENCY  AND   BAXETNG   IN  THE  UNTTED   STATES. 

The  preceding  remarks  have  been  submitted,  for  the  reason 
that  without  an  accurate  knowledge  of  the  grounds  upon  which 
the  country  divided  as  to  the  nature  of  its  Constitution,  the 
controversies  in  reference  to  Banks  and  money  which  have 
so  convulsed  it  throughout  its  history  would  seem  to  be  mere 
riddles,  —  contests  ha^dng  no  more  sense  or  meaning  than  those 
which  make  up  the  experience  of  barbarous  life.  The  ques- 
tion involved  was  not  a  financial  or  monetary,  but  a  political 
one.  No  one  distinguished  person  among  all  the  actors  in  the 
grand  drama  ever  denied  the  importance  of  Banks.  They 
were  created  in  all  the  States  as  a  matter  of  common  necessity. 
The  only  question  was  as  to  the  competency  of  the  United 
States  to  create  them.  The  consequences  were  infinitely 
wider  and  more  disastrous  than  if  the  contest  had  turned  upon 
the  principles  involved  in  the  nature  of  metallic  or  paper 
money.  Had  this  been  the  question,  no  more  heat  might  have 
been  generated  than  that  belonging  to  the  consideration  of 
any  question  in  science  or  philosophy.  As  it  was  presented, 
its  solution  might  involve,  on  one  side  at  least,  the  destruction 
of  the  institutions  of  a  whole  people.  It  was,  therefore,  the 
question  of  all  others  most  fitted  to  excite  to  the  highest 
pitch  of  frenzy  some  of  the  strongest  passions  of  the  race.  It 
was  the  signal  for  the  division  of  the  country  into  two  great 
political  parties  ;  the  theme  which  has  convulsed  it  from  the 
formation  of  the  government,  and  which  could  be  put  to  rest 
only  by  the  triumph  by  arms  of  one  or  the  other  of  the  oppos- 
ing parties. 

The  Act  establishing  the  Bank  was  finally  passed  on  the 
25th  of  February,  1791.  The  amount  of  its  capital  was  fixed 
at  $10,000,000,  divided  into  shares  of  8400  each.  Of  this  sum, 
$2,000,000  was  to  be  subscribed  on  behalf  of  the  United  States, 
to  be  paid  in  ten  equal  annual  instalments.  The  balance  of 
the  share  capital,  88,000,000,  to  be  taken  by  private  parties, 
was  to  be  paid  in  six  equal  annual  instalments  :  one-fourth  part 
of  which  was  to  be  in  gold  and  silver  coin ;  the  remaining 
three-fourths,  in  evidences  of  the  public  debt.  The  Board  of 
•Directors  was  to  consist  of  twenty-five  members,  all  of  them 
citizens  of  the  United  States,  who  were  to  choose  one  of  their 
number  President.  The  Bank  was  not  to  owe,  over  and  above 
its  deposits,  a  larger  sum  than  its  capital.     It  was  allowed  to 


BANKS   OF  THE  UNITED   STATES.  473 

sell  any  part  of  the  securities  of  which  its  capital  was  com- 
posed, but  was  not  allowed  to  purchase  any  kind  of  public 
debt  whatever.  Its  notes  were  not  made  legal  tender,  but 
were  receivable  in  the  payment  of  the  revenues,  of  which  it 
was  at  the  same  time  made  the  depository.  The  Act  also 
provided  that  "  said  corporation  shall  not,  directly  or  indirectly, 
deal  or  trade  in  any  thing  except  bills  of  exchange,  gold  or 
silver  bullion,  or  in  the  sale  of  goods  really  and  truly  pledged 
for  money  lent,  and  not  redeemed  in  due  time,  or  of  goods 
which  shall  be  the  produce  of  its  lands ;  neither  shall  the  said 
corporation  take  more  than  at  the  rate  of  six  per  centum  per 
annum  for  or  upon  account  of  its  loans  or  discounts.  Xo  loan 
shall  be  made  by  said  corporation  for  the  use,  or  on  account, 
of  the  government  of  the  United  States,  to  an  amount  ex- 
ceeding $100,000 ;  or  of  any  particular  State  to  an  amount 
exceeding  $50,000 ;  or  of  any  foreign  prince  or  State,  unless 
previously  authorized  by  a  law  of  the  United  States."  Pro\'i- 
sion  was  made  in  the  bill  for  the  establisliment  of  eifjht 
branches :  one  at  Boston,  with  a  caj^ital  of  $700,000  ;  one  at 
New  York,  with  a  capital  of  $1,800,000  ;  one  at  Baltimore, 
with  a  capital  of  $600,000  ;  one  at  Washington,  with  a  capital  of 
$200,000  ;  one  at  Norfolk,  with  a  capital  of  $600,000 ;  one  at 
Charleston,  with  a  capital  of  $600,000  ;  one  at  Savannah,  with 
a  capital  of  $500,000  ;  and  one  at  New  Orleans,  with  a  capital 
of  $300,000.  The  balance  of  the  capital,  $4,700,000,  was 
assigned  to  Philadelphia,  where  the  Bank  was  to  have  its  chief 
office. 

The  Act,  like  every  thing  that  came  from  the  hand  of  its 
author,  was  a  masterpiece  of  its  kind.  It  might,  indeed,  serve  as 
a  model  for  all  countries  and  all  times.  All  its  provisions  were 
perfectly  adapted  to  their  object,  —  the  creation  of  a  symbolic 
currency,  by  means  of  which  the  revenues  of  the  government 
could  be  collected  and  disbursed,  and  the  exchanges  effected, 
without  the  interposition  of  coin.  The  notes  of  a  government 
made  receivable  in  the  payment  of  the  revenues,  and  bearing  a 
proper  proportion  thereto,  might,  without  any  other  provision 
for  their  redemption,  maintain  themselves  at  a  high  value 
for  the  uses  they  would  serve.  The  taxes  to  be  paid  in  them 
would  be  the  constituent  provided  for  their  discharge.  As, 
however,  such  notes  would  always  be  without  a  constituent  in 


474      CURRENCY  AND   BANKING  IN  THE   UNITED   STATES. 

merchandise,  and  as  there  would  always  be  a  tendency  to  issue 
them  in  excess  of  the  revenues  presently  falling  due,  they 
might,  and  often  would,  become  disturbing  elements  in  the 
business  operations  of  the  country.  The  notes  of  a  Bank 
symbolizing  merchandise  could  be  liable  to  no  such  objection. 
There  could  be  no  excess,  wliile  the  use  of  such  notes  in  the 
payment  of  the  revenues  would  greatly  strengthen  the  institu- 
tion issuing  them.  A  panic  affecting  the  general  credit  could 
exert  very  little  influence  in  causing  the  notes  receivable  for 
revenues  to  be  returned  for  coin  ;  for  the  reason  that,  whatever 
the  value  of  their  constituent  either  in  coin  or  merchandise,  so 
long  as  they  were  so  receivable  their  holders  would,  as  a  rule, 
have  no  inducement  to  return  them.  There  is  the  same  reason 
that  the  revenues  of  government  should  be  paid  in  symbolic 
money  as  that  the  exchanges  of  the  public  should  be  made  by 
means  of  it.  The  parties  to  whom  it  is  paid  will,  as  a  rule, 
wish  to  use  it  as  money;  and,  if  it  represent  what  they  have 
occasion  to  purchase  and  consume,  it  will  be  preferred  to  coin. 
The  interest  payable  on  the  public  debt  should,  so  far  as  the 
government  is  concerned,  be  always  paid  or  provided  for  in 
symbolic  money.  If  payable  abroad,  it  will,  in  fact,  be  paid 
in  great  measure  in  merchandise.  Those  who  are  to  receive 
it,  if  paid  in  coin,  will  immediately  seek  to  expend  it  for  mer- 
chandise, —  perhaps  of  the  very  kind  which  the  paper  money 
of  the  indebted  nation  S3anbolized.  For  such  payments,  there- 
fore, merchandise  will  serve  as  well  as  coin.  Those  made  by 
nations  not  producing  gold  and  silver  must,  from  necessity,  be 
paid  in  it ;  the  mode  of  payment  by  government  being  the  use 
of  merchants'  or  bankers'  bills  representing  merchandise.  The 
exports  of  a  people,  therefore,  not  producing  metallic  money, 
must  exceed  their  imports  by  the  amount  of  the  annual  pay- 
ments they  are  compelled  to  make  not  arising  out  of  commer- 
cial transactions.  All  that  a  government  indebted  abroad  has 
to  do  is  to  provide  itself  with  sjnnbolic  money,  as  its  issuers 
must  supply  to  it  whatever  will  discharge  its  indebtedness 
wherever  it  may  exist. 

Such  were  the  financial  measures  provided  for  the  nation  at 
the  very  beginning  of  its  career,  —  measures  as  perfect  as  could 
be  provided  by  the  hand  of  man,  and  equally  adapted  to  all  con- 
ditions and  all  times ;  and  such  are  some  of  the  services  Ham- 


CKEATION   OF   STATE   BANKS.  475 

ilton  rendered  to  his  country.  With  the  Bank  of  England  as 
an  example,  that  created  by  him  was  a  vast  improvement  upon 
the  model.  The  latter,  in  theory  at  least,  cannot  convert  that 
part  of  its  capital  represented  by  the  public  debt.  A  large 
portion  of  its  means,  consequently,  are  not  available  when 
most  needed.  If,  instead  of  this  stock,  it  held  a  corresponding 
amount  of  good  bills,  it  would  be  absolutely  beyond  the  reach 
of  harm  ;  the  causes  or  occasions  of  the  monetary  crises  now 
so  frequently  happening  could  not  exist.  They  did  not  exist 
until  after  the  Bank  got  into  the  clutches  of  the  government, 
—  an  embrace,  unfortunately,  as  advantageous  to  it  as  it  is  dis- 
astrous to  the  general  welfare.  The  government  is  too  good  a 
customer  not  to  be  preferred  to  the  public.  The  Bank  of  the 
United  States  was  wholly  free  fi^om  such  an  entangling  alli- 
ance. After  its  organization,  it  speedily  converted  its  govern- 
ment debt  into  money,  and  consequently  had  at  all  times  its 
capital  in  hand.  As  a  consequence,  the  period  of  its  existence 
was  the  brightest  one  in  the  whole  financial  or  monetary  history 
of  the  country.  It  was  the  Golden  Age,  soon  to  be  over- 
whelmed by  one  of  barbarism,  which  in  its  ignorance,  intoler- 
ance  and  ferocity,  carries  us  back  a  thousand  years. 

At  the  time  the  first  Bank  went  into  operation,  there  were 
only  three  State  Banks,  — the  Bank  of  North  America,  at 
Philadelphia  ;  the  Massachusetts  Bank,  at  Boston ;  and  the 
Bank  of  New  York,  at  New  York  City.  The  aggregate  capital 
of  these,  when  organized,  equalled  81,650,000.  In  1792,  the 
number  of  State  Banks  had  increased  to  eleven,  with  an  aggre- 
gate capital  of  88,935,000.  In  1801,  the  number  had  increased 
to  thirty-two,  whose  joint  capital  equalled  823,500,000.  In 
1805,  there  were  seventj^-five  State  Banks,  with  a  capital  of 
$40,493,000, — an  amount  exceeding  four  times  the  capital 
of  the  United  States  Bank.  The  excellence  of  the  system  of 
Hamilton  was,  that  while  it  created  a  Bank  whose  operations 
extended  to  every  part  of  the  country,  and  by  means  of  which 
the  revenues  were  collected  and  disbursed,  it  allowed  the  crea- 
tion of  State  or  local  Banks,  by  means  of  whose  issues  the 
greater  part  of  the  exchanges  must  always  be  effected.  The 
system  was  ideally  as  well  as  practically  perfect  in  all  its  parts. 
A  currency  adapted  to  local  exchanges  must  be  locally  supplied, 
for  the  reason  that  it  can  be  properly  issued  only  by  parties 


476      CURRENCY  AND   BANKING  IN   THE  UNITED   STATES. 

possessing  a  competent  knowledge  of  the  means  and  character 
of  the  applicants  for  loans.  It  will  yet  be  found  that  the  only 
possible  mode  of  retrieving  our  condition,  and  securing  a  cur- 
rency uniform  in  amount  and  value,  will  be  a  return  to  the 
financial  system  of  Hamilton  ;  just  as  a  return  to  the  maxims 
and  policy  of  Washington  will  be  the  only  safe  guarantee  for 
the  domestic  peace  and  order  of  the  country. 

The  approval  of  the  Bank  by  all  the  departments  of  govern- 
ment, and  by  the  Supreme  Court  as  soon  as  the  question  could 
be  presented  to  that  tribunal,  only  served  to  increase  and 
imbitter  the  hostility  of  Jefferson  to  a  construction  so  opposed 
to  all  his  theories,  and,  in  his  estimation,  so  fraught  with 
danger  to  that  portion  of  the  country  with  which,  not  only  as 
a  citizen,  but  from  his  training,  habits,  and  ideas,  he  was  so 
closely  identified.  The  Bank,  indeed,  seemed  beyond  his  reach. 
To  claim  such  a  measure  as  this  to  be  sufficient  ground 
for  breaking  up  the  government  would  only  expose  him  to 
ridicule  and  contempt ;  and  he  patiently  bided  his  time.  This 
was  not  long  in  coming.  Washington  in  due  time  was  suc- 
ceeded by  Mr.  Adams,  whose  great  personal  unpopularity 
exposed  him  to  constant  and  virulent  attacks  from  newspapers 
and  foreigners  in  the  interest  of  France.  To  protect  him,  as 
well  as  the  government,  were  passed  the  famous  "  Alien  and 
Sedition  Laws,"  enacted  to  punish  libellers,  and  foreigners 
who  used  the  asylum  offered  by  the  country  for  the  purpose 
of  embroiling  it  in  war.  The  laws  were  very  probably  ill- 
advised  and  inopportune,  although  Washington  did  not  so 
regard  them.  They  were  Jefferson's  great  occasion.  In  op- 
position to  them,  he  immediately  drafted  the  celebrated 
resolutions  which  were  passed  by  the  legislature  of  the  State  of 
Virginia  in  1798,  and  by  that  of  Kentucky  in  1799  ;  and  which, 
among  other  tilings,  declared :  — 

"  That  the  several  States  composing  the  United  States  of  Amer- 
ica are  not  vuiited  on  the  principle  of  unHmited  submission  to  their 
general  government,  but  that,  by  a  conipact  under  the  style  and 
title  of  the  Constitution  of  the  United  States,  and  of  amendments 
thereto,  they  constituted  a  general  government  for  special  purposes  ; 
delegated  to  that  government  certain  definite  powers ;  reserving, 
eacli'  State  to  itself,  the  residuary  measure  of  right  to  their  own 
self-government ;  and  that,  whensoever  the  general  government 
assumes  undelegated  powers,  its  acts  are  unauthoritative,  void,  and 


jeffeeson's  construction  of  the  constitution.    477 

of  no  force  ;  that  to  this  compact  each  State  acceded  as  a  State, 
and  is  an  integral  party  :  that  the  government  created  by  this 
compact  was  not  made  the  exclusive  or  final  judge  of  the  extent  of 
the  powers  delegated  to  itself,  since  that  would  have  made  its  dis- 
cretion, and  not  the  Constitution,  the  measure  of  its  powers  ;  but 
that,  as  in  all  other  cases  of  compact  among  parties  having  no  com- 
mon judge,  each  party  has  an  equal  right  to  judge  for  itself,  as 
well  of  infractions,  as  of  the  mode  and  measure  of  redress,  .  .  . 
and  that  a  nullification  by  those  sovereignties  of  all  unauthorized 
acts  done  under  the  color  of  that  instrument  is  the  rightful 
remedy." 

These  resolutions  embodied  in  a  most  complete  and  perfect 
form  Jefferson's  constructioa  of  the  Constitution  as  opposed  to 
that  of  Hamilton,  who  insisted  that  it  united  the  people  not 
as  a  confederacy,  but  as  a  nation.  They  took  the  whole  ques- 
tion out  of  the  arena  of  the  National  Legislature  and  of  the 
courts,  and  submitted  it  to  the  opinions  and  judgment  of  the 
whole  people ;  by  whom,  or  by  a  great  majority  of  whom,  at 
least  so  far  as  their  decision  could  be  gathered  from  the  ex- 
pressions of  their  popular  assemblies,  they  were  accepted  as 
the  cardinal  rule  for  the  construction  of  the  Constitution,  and 
as  justifying  the  destruction  of  the  government,  whenever  it 
should  suit  the  interest  or  caprice  of  any  member  of  it. 

It  will  be  proper  in  this  connection  to  consider  further  the 
opinions  upon  government,  and  upon  the  nature  of  our  own, 
of  this  extraordinary  man,  who  exerted  such  a  paramount  and 
baleful  influence  over  the  nation  for  the  first  hundred  years  of 
its  existence.  He  was,  in  fact,  opposed  to  all  governments 
worthy  the  name.  No  one  had  the  natural  right  to  bind  any 
generation  not  a  party  to  it. 

"  Can,"  he  said,  "  one  generation  bind  another,  and  all  others,  in 
succession  for  ever  ?  I  think  not.  The  Creator  has  made  the  earth 
for  the  living,  not  the  dead.  Rights  and  powers  can  only  belong  to 
persons,  not  to  things,  —  not  to  mere  matter,  unendowed  with 
will.  The  dead  are  not  even  things.  The  particles  of  matter  which 
composed  their  bodies  make  part  now  of  the  bodies  of  other  ani- 
mals, vegetables,  or  minerals,  of  a  thousand  forms.  To  what,  then, 
are  attached  the  rights  and  powers  they  held  while  in  the  form  of 
men  ?  A  generation  may  bind  itself  as  long  as  its  majority  contin- 
ues in  life  ;  when  that  has  disappeared,  another  majority  is  in  place, 
holds  all  the  rights  and  powers  their  predecessors  once  held,  and 
may  change  their  laws  and  institutions  to  suit  themselves.  Noth- 
ing is  unchangeable  but  the  inherent  and  inalienable  rights  of  men."  ^ 

1  Letter  to  Major  Cartwright,  Jefferson's  Works,  vol.  vii.  p.  369. 


478      CURRENCY  AND   BANKING  IN  THE  UNITED   STATES. 

«  The  earth  belongs  to  the  living,  not  to  the  dead.  The  will  and 
the  power  of  man  expire  with  his  life,  by  nature's  law.  Some  soci- 
eties give  it  an  artificial  continuance  for  the  encouragement  of 
industry  ;  some  refuse  it,  as  our  aboriginal  neighbors,  whom  we  call 
barbijrians.  The  generations  of  men  may  be  considered  as  bodies 
or  corporations.  Each  generation  has  the  usufruct  of  the  earth 
during  the  period  of  its  continuance.  When  it  ceases  to  exist,  the 
usufruct  passes  on  to  the  succeeding  generation,  free  and  unencum- 
bered ;  and  so  on,  successively,  from  one  generation  to  another  for 
ever.  We  may  consider  each  generation  as  a  distinct  nation,  with 
a  right,  by  the  will  of  its  majority,  to  bind  themselves,  but  none 
to  bind  the  succeeding  generation  more  than  the  inhabitants  of 
another  country.  Or  the  case  may  be  likened  to  the  ordinary  one  of 
a  tenant  for  life,  who  may  hypothecate  the  land  for  his  debts  during 
the  continuance  of  his  usufruct ;  but  at  his  death  the  reversioner 
(who  is  for  life  only)  receives  it  exonerated  from  all  burden.  The 
period  of  a  generation,  or  the  term  of  its  life,  is  determined  by  the 
laws  of  mortality,  which,  varying  a  little  only  in  different  climates, 
offer  a  general  average  to  be  found  by  observation.^ 

Jefferson's  notions  of  the  nature  of  what  little  government 
"we  had  in  this  country  were  well  set  out  in  the  letter  to  Major 
Cartwright,  above  quoted :  — 

"  "With  respect  to  our  State  and  Federal  governments,  I  do  not 
think  their  relations  correctly  understood  by  foreigners.  They 
generally  suppose  the  former  subordinate  to  the  latter.  This  is  not 
the  case.  They  are  co-ordinate  departments  of  a  single  and  inte- 
gral whole.  To  the  State  governments  are  reserved  all  legislation 
and  administration  in  affairs  which  concern  their  own  citizens  only, 
and  to  the  Federal  Government  is  given  whatever  concerns  for- 
eigners, or  the  citizens  of  other  States ;  these  functions  alone  being 
made  federal.  The  one  is  the  domestic,  the  other  the  foreign, 
branch  of  the  same  government ;  neither  having  control  over  the 
other,  but  within  its  own  department.  There  are  one  or  two  ex- 
ceptions only  to  this  partition  of  power.  But,  you  may  ask,  if  the 
two  departments  should  claim  the  same  subject  of  power,  where  is 
the  common  umpire  to  decide  ultimately  between  them  ?  In  cases 
of  little  importance  or  urgency,  the  prudence  of  both  parties  will 
keep  them  aloof  from  the  questionable  ground  ;  but,  if  neither  can 
be  avoided  nor  compromised,  a  convention  of  the  States  must  be 
called  to  ascribe  the  doubtful  power  to  that  department  which 
they  may  think  best."  ^ 

His  hostility  to  the  present  Constitution  was  early  pro- 
claimed. Writing  from  Paris,  under  date  of  Nov.  13,  1787, 
he  says,  — 

1  Letter  to  J.  W.  Eppes,  JeflTerson's  Works,  vol.  vj.  p.  136. 

2  Jefferson's  Works,  vol.  vii.  p.  358. 


Jefferson's  political  PRiNcrPLEs.  479 

"Indeed,  I  think  all  the  good  of  this  new  Constitution  might 
have  been  couched  in  three  or  four  new  articles,  to  be  added  to 
the  good,  old,  and  venerable  fabric,  which  should  have  been  pre- 
served even  as  a  religious  relique."  ^ 

From  the  preceding  extracts,  it  will  be  seen  that  Jeiferson 
completely  ignored  the  Supreme  Court  of  the  United  States 
as  the  authorized  expounder  of  the  Constitution.  In  reference 
to  this  tribunal,  he  says :  — 

"  The  judiciary  of  the  United  States  is  the  subtle  corps  of  sappers 
and  miners  constantly  working  under  ground  to  undermine  the 
foundations  of  our  constitutional  fabric.  They  are  construing  our 
Constitution  from  a  co-ordination  of  a  general  and  special  govern- 
ment to  a  general  and  supreme  one  alone.  This  will  lay  all  things 
at  their  feet ;  and  they  are  too  well  versed  in  English  law  to 
forget  the  maxim,  Boni  judicis  est  mnpliare  jurisdictioneia.  We 
shall  see  if  they  are  bold  enough  to  take  the  daring  stride  these  five 
lawyers"  (judges)  "have  lately  taken.  Having  found,  from  expe- 
rience, that  impeachment  is  an  impracticable  thing,  a  mere  scarecrow, 
they  consider  themselves  secure  for  life ;  they  skulk  from  responsi- 
bility to  public  opinion,  —  the  only  remaining  hold  u]ion  them, — 
under  a  practice  first  introduced  into  England  by  Lord  Mansfield. 
An  opinion  is  huddled  up  in  conclave  (perhaps  by  a  majority  of 
one),  delivered  as  if  unanimous,  and  with  the  silent  acquiescence  of 
lazy  or  timid  associates,  by  a  crafty  chief  judge"  (Marshall),  "who 
sophisticates  the  law  to  his  mind  by  the  turn  of  his  own  reasoning." 
A  judiciary  law  was  once  reported  by  the  Attorney-General  to  Con- 
gress, requiring  each  judge  to  deliver  his  opinion  seriatim  and 
openly,  and  then  to  give  it  in  writing  to  the  clerk  to  be  entered  on 
the  record.  A  judiciary  independent  of  a  king  or  executive  alone, 
is  a  good  thing ;  but  independence  of  the  will  of  the  nation  is  a 
solecism,  at  least  in  a  republican  government."  ^ 

Jefferson  would  have  no  government  capable  of  binding 
the  future,  and  no  courts  as  the  final  arbiters  of  disputes. 
His  remedy  for  misgovernment  and  political  oppression  was 
rebellion :  — 

"  Wonderful  is  the  effect  of  impudent  and  persevering  lying. 
The  British  ministry  have  so  long  hired  their  gazetteers  to  repeat, 
and  model  into  every  form,  lies  about  our  being  in  anarchy,  that  the 
world  has  at  length  believed  them,  the  English  nation  has  believed 

1  Letter  to  John  Adams,  Jefferson's  "Works,  vol.  ii.  p.  317. 

2  The  case  referred  to  was  McCuUoch  v.  The  State  of  Maryland,  in  which 
Judge  Jilarshall  made  his  famous  argument  in  support  of  the  constitutionality  of 
the  Bank. 

.3  Letter  to  Thomas  Ritchie,  Jefferson's  "Works,  vol.  vii.  p.  192. 


480       CURRENCY  AND   BANKING    IN  THE   UNITED   STATES. 

them,  the  ministers  themselves  have  come  to  believe  them,  and, 
what  is  more  wonderful,  we  have  believed  them  ourselves.  Yet 
where  does  this  anarchy  exist?  Where  did  it  ever  exist,  except  in 
the  single  instance  of  Massachusetts  ?  And  can  history  produce  an 
instance  of  rebellion  so  honorably  conducted  ?  I  say  nothing  of  its 
motives.  They  were  founded  in  ignorance,  not  wickedness.  God 
forbid  we  should  ever  be  twenty  years  without  such  a  rebellion  ! 
The  people  cannot  be  all  and  always  well  informed,  ^he  part 
which  is  wrong  will  be  discontented  in  proportion  to  the  impor- 
tance of  the  facts  they  misconceive.  If  they  remain  quiet  under 
such  misconceptions,  it  is  a  lethargy,  —  the  forerunner  of  death  to 
the  public  liberty.  We  have  had  thirteen  States  independent  for 
eleven  years.  There  has  been  one  rebellion.  That  comes  to  one 
rebellion  in  a  century  and  a  half  for  each  State.  What  country 
before  ever  existed  a  century  and  a  half  without  a  rebellion  ?  And 
what  country  can  preserve  its  liberties,  if  its  rulers  are  not  warned 
from  time  to  time  that  their  people  preserve  the  spirit  of  resistance  ? 
Let  them  take  arms.  The  remedy  is  to  set  them  right  as  to  facts, 
pardon  and  pacify  them.  What  signify  a  few  lives  lost  in  a  century 
or  two  ?  The  tree  of  liberty  must  be  refreshed  from  time  to  time 
with  the  blood  of  patriots  and  tyrants.     It  is  its  natural  manure."  ^ 

Jefferson  not  only  most  earnestly  opposed  Washington's 
principles  of  government,  but  he  claimed  to  have  been,  by 
his  election  to  the  Presidency,  the  instrument  for  their  com- 
plete overthrow.  Writing  to  Judge  Roane,  under  date  of 
September  6,  1819,  soon  after  the  famous  decision  of  Judge 
Marshall  affirming  the  constitutionality  of  the  United  States 
Bank,  he  said  :  ^  — 

« The  Revolution  of  1800  was  as  complete  a  revolution  in  the 
principles  of  our  government  as  that  of  1776  was  in  its  form  ;  not 
effected,  indeed,  by  the  sword,  as  that,  but  by  the  rational  and 
peaceable  instrument  of  reform,  —  the  suffrage  of  the  people.  The 
nation  declared  its  will  by  dismissing  functionaries  of  one  principle, 
and  electing  those  of  another,  in  the  two  branches —  executive  and 
legislative  —  submitted  to  their  election.  Over  the  judiciary  de- 
partment the  Constitution  had  deposed  them  of  their  control. 
That,  therefore,  has  continued  the  re2>robcited  system." 

The  preceding  extracts,  which  might  be  multiplied  in 
kind,  so  as  to  fill  a  volume,  furnish  the  key,  and  the  only  one, 
by  means  of  which  the  political  as  well  as  the  financial 
history  of  this  country  can  be  made  intelligible,  not  only  to 
foreigners,  but  to  ourselves.  Up  to  1860,  Jefferson  was  the 
patron  saint  of  the  nation.     His  teachings  in  reference  to  the 

1  Letter  to  Colonel  Smith,  Jefferson's  Works,  vol.  ii.  pp.  318,  319. 

2  Ibid.  vol.  vii,  p.  133. 


JEFFERSON'S   POLITICAL   PRINCIPLES.  481 

nature  of  our  government  were  held  to  be  the  sum  of  political 
wisdom.  Taught  only  too  well,  a  part  of  the  nation,  in  antici- 
pation of  any  overt  act  or  grievance,  withdrew  from  the  Union. 
From  opinion,  which  up  to  that  time  had  been  the  arbiter  of 
events,  the  North  took  an  appeal  to  a  still  higher  tribunal,  — 
that  of  the  sword.  Then  flowed  like  a  flood  the  blood  which, 
with  Mr.  Jefferson,  was  "the  natural  manure  of  the  tree  of 
libert3^"  In  this  final  appeal  he  was  again  overruled,  and  an 
emphatic  judgment  reaflirmed  for  his  great  rival.  The  over- 
throw of  Jefferson  was  a  revolation  as  much  in  the  literature 
as  in  the  politics  of  the  country.  If  his  teachings  were  false, 
then  the  works  which  sought  to  base  upon  them  its  institu- 
tions were  equally  so.  Hence  the  desperate  attempt,  so  late 
as  1865,  of  our  great  historian  to  impose  upon  the  ignorance 
and  credulity  of  the  nation,  that  Jefferson  was  the  champion 
of  whatever  centralizing  tendency  oui"  Constitution  contained, 
and  that  "  no  man  ever  contributed  so  much  toward  the  con- 
solidation of  the  Union :  "  — 

"  When  John  Adams,"  says  Mr.  Bancroft,  "  was  elected  Presi- 
dent, before  any  overt  act,  before  any  other  cause  of  alarm  than 
his  election,  the  legislature  of  Virginia  took  steps  for  an  armed 
organization  of  the  State,  and  old  and  long-cherished  sentiments 
adverse  to  union  were  renewed.  The  continuance  of  the  Union  was 
in  peril.  It  was  then  that  the  great  Virginia  statesman,  now  per- 
fectly satisfied  with  the  amended  Constitution,  came  to  the  rescue. 
.  .  .  The  thouglit  never  crossed  the  mind  of  Jefferson  that  the 
general  government  had  not  proper  powers  of  coercion.  .  .  .  No 
one  man  did  so  much  as  he  towards  consolidating:  the  Union."  ^ 


'O 


As  Jefferson  was  the  very  person  through  whose  influence 
"  the  legislature  of  Virginia  took  steps  for  an  armed  organiza- 
tion of  the  State,"  and  was  himself  the  author  of  those  "  old 
and  long-cherished  sentiments  hostile  to  the  Union,"  the  as- 
sertion, that  at  the  moment  when,  under  the  elder  Adams,  the 
stability  of  the  government  was  threatened,  —  and  all  know 
how  seriously  it  was  threatened,  —  "  he  rushed  to  the  rescue," 
may  well  excite  astonishment.  He  was  the  person  who,  far  in 
advance  of  all  others,  developed  and  proclaimed,  in  all  their 
length  and  breadth,  the  doctrines  of  nullification.  But  for  him, 
they  might  not  have  been  heard  of  for  a  half  century.     So 

I  Place  of  Abraham  Lincoln  in  History,  by  George  Bancroft,  Atlantic 
Monthly,  June,  1865. 

31 


482      CUEEENCY  AND    BANKING   IN   THE   UNITED   STATES. 

alarming  were  the  consequences  of  his  teachings,  and  so  insidi- 
ous and  untiring  his  efforts  to  undermine  the  government,  that 
Wasliington,  who  had  wholly  retired  from  public  life,  which 
he  hoped  never  again  to  enter,  was  forced  to  forego  his  deter- 
mination, and  appear  once  more  in  the  political  arena.  The 
Virginia  Resolutions  were  passed  in  the  latter  part  of  Decem- 
ber, 1798.  No  sooner  had  the  knowledge  of  this  reached  him, 
than  he  made  an  earnest  appeal  to  Patrick  Henry,  who  had 
now  become  a  supporter  of  the  Constitution,  to  consent  to 
become  a  member  of  the  State  legislature,  in  order  to  be  in  a 
position  in  which  he  could  exert  his  great  influence  to  defeat 
a  movement  aimed  at  the  very  life  of  the  nation :  — 

"  It  would  be  a  waste  of  time,"  said  Washington,  "  to  attempt  to 
bring  to  the  view  of  a  person  of  your  observation  and  discernment 
the  endeavors  of  a  certain  party  (referring  to  Jefferson)  among  us, 
to  disquiet  the  pubHc  mind  with  unfounded  alarms,  to  arraign 
every  act  of  the  administration,  to  set  the  people  at  variance  with 
their  government,  and  to  embarrass  all  its  measm-es.  Equally  use- 
less would  it  be  to  predict  what  must  be  the  inevitable  consequences 
of  such  a  policy,  if  it  cannot  be  arrested. 

"  Unfortunately,  and  extremely  do  I  regret  it,  the  State  of  Vir- 
ginia has  taken  the  lead  in  this  opposition.  I  have  said  the  State, 
because  the  conduct  of  its  legislature  in  the  eyes  of  the  world  will 
authorize  the  expression  ;  and  because  it  is  an  incontrovertible  fact, 
that  the  principal  leaders  of  the  opposition  dwell  in  it,  and  that, 
with  the  help  of  the  chiefs  in  other  States,  all  the  plans  are  arranged 
and  systematically  pursued  by  their  followers  in  other  parts  of  the 
Union ;  though  in  no  State  except  Kentucky,  that  I  have  heard  of, 
has  legislative  countenance  been  obtained  beyond  Virginia.  .  .  . 
At  such  a  crisis  as  this,  when  every  thing  dear  and  valuable  to  lis  is 
assailed ;  when  this  party  hangs  upon  tlie  wheels  of  government  as  a 
dead  weight,  opposing  every  measure  that  is  calculated  for  defence 
and  self-preservation  ;  when  measures  are  systematically  and  perti- 
naciously pursued  which  must  eventually  dissolve  the  Uxion,  or 
PRODUCE  coercion,  —  I  Say,  when  these  things  have  become  so  obvi- 
ous, ought  characters  (like  yourself),  who  are  best  able  to  rescue 
the  country  from  the  pending  evil,  to  remain  at  home  ?  Kather 
ought  they  not  to  come  forward,  and  by  their  talents  and  influence 
stand  in  the  breach  which  such  conduct  has  made  on  the  peace  and 
happiness  of  this  country,  and  oj^pose  the  widening  of  it? 

"Vain  will  it  be  to  look  for  peace  and  happiness,  or  for  the 
security  of  liberty  or  property,  if  civil  discord  should  ensue.  And 
what  else  can  result  from  the  policy  of  those  among  us  who,  by  all 
the  measures  in  their  power,  are  driving  matters  to  exti'emity,  if 
they  cannot  be  counteracted  effectually  ?  ...  If  their  conduct  is 
viewed  with  indifference, — if  there  are  activity  and  misrepresentation 
on  one  side,  and  supineness  on  the  other,  —  their  numbers  accumu- 


QUESTION   OF    THE   RE-CHARTERING   OF   THE  BANK.      483 

lated  by  intriguing  and  discontented  foreigners  under  proscription, 
who  are  at  Avar  with  their  own  governments,  and  the  greater  part 
of  them  with  all  governments,  they  will  increase,  and  nothing  short 
of  Omniscience  can  foretell  the  consequences.  .  .  .  Your  weight  of 
chai-acter  and  influence  in  the  House  of  Representatives  would  be 
a  bulwark  against  such  dangerous  sentiments  as  are  delivered  there 
at  present.  It  would  be  a  rallying-point  for  the  timid,  and  an 
attraction  to  the  wavering.  In  a  word,  I  conceive  it  to  be  of  im- 
mense importance  at  this  crisis  that  you  should  be  there;  and  I 
would  fain  hope  that  all  minor  considerations  will  be  made  to  yield 
to  the  measure. 

"  If  I  have  erroneously  supposed  that  your  sentiments  on  these 
subjects  are  in  unison  with  mine,  or  if  I  have  assumed  a  liberty 
which  the  occasion  does  not  warrant,  I  must  conclude,  as  I  began, 
with  praying  that  my  motives  may  be  received  as  an  a])ology.  My 
fear  that  the  tranquillity  of  the  Union,  and  of  this  State  in  particu- 
lar, is  hastening  to  an  awful  crisis,  has  extorted  them  from  me."  ^ 

Which  of  the  two  came  to  the  rescue  when  the  "  legislature 
of  Virginia  took  steps  for  an  armed  organization  of  the  State, 
and  old  and  long-cherished  sentiments  adverse  to  the  Union 
were  renewed,"  —  the  author  of  these  hostile  steps  and  senti- 
ments, or  he  who  saw  in  them  a  meaning  of  such  terrible 
import ;  who  exerted  himself  so  strenuously  for  their  defeat, 
and  who  foresaw,  if  they  could  not  be  arrested  by  an  appeal 
to  public  opinion,  the  terrible  catastrophe  of  the  civil  war, 
—  in  which,  when  it  did  come,  half  a  million  of  lives  and  ten 
thousand  millions  of  property  were  sacrificed  ?  The  amazing 
untruthfulness  with  which  history  has  been  written  in  this 
country  is  in  itself  a  most  striking  illustration  of  the  hold 
which  Jefferson  has  had  upon  the  public  mind. 

The  charter  of  the  Bank  expired  on  the  4th  of  March, 
1811.  In  view  of  such  expiration,  its  stockholders,  in  1808, 
memorialized  Congress  for  its  renewal.  The  bill  for  this  pur- 
pose, although  strongly  supported  by  Mr.  Gallatin,  then 
Secretary  of  the  Treasury,  was  defeated  in  the  House  by  a 
single  vote,  and  in  the  Senate  by  the  casting  vote  of  its  Presi- 
dent. The  ground  on  which  the  extension  of  the  charter  of 
the  Bank  was  refused  was  the  unconstitutionality  of  the 
measure ;  in  other  words,  the  grounds  upon  which  Jefferson 
o] /posed  the  first  Bank,  and  to  which  he  clung  with  unyielding 

1  Letter  to  Patrick  Henry,  Sparks'  Life  of  Washington,  vol.  xi.  pp.  388-91. 


484      CUEEENCY  AND   BANKING  IN   THE  UNITED   STATES. 

tenacity.     The  Bank  ha\'ing  ceased  to  exist,  the  government 
was,  from  necessity,  driven  to  the  employment  of  State  Banks. 
It  used  them  as  depositories  of  the  revenues,  and  received  their 
notes  in  payment.     No  sooner,  however,  was  it  seen  that  the 
charter  of  the  United  States  Bank  was  not  to  be  renewed,  than 
all  the  States  vied  with  each  other  in  the  rage  for  the  creation 
of  local  Banks.^     In  1812,  the  nation  found  itself  involved  in  a 
war  with  Great  Britain.     In  1814,  all  the  Banks  of  the  coun- 
try, with  the  exception  of  those  of  New  England,  suspended 
payment.     The  government  was  speedily  reduced  to  a  most 
mortifying  and  dangerous  position.     The  expenses  of  the  war 
could  only  be  met  by  loans  made  payable  in  bank-notes  greatly 
depreciated  and  rapidly  sinking  in  value.     Specie  was  not  to 
be  had.     Their  decline  was  much  more  rapid  in  the  outset  than 
that  of  the  Revolutionary  currency.     For  the  former,  the  whole 
wealth    of   the    nation   was   assumed   to   be  pledged,  and  it 
derived  an  additional  value  from  being    made  legal-tender. 
The  notes  of  the  State  Banks  had  no  such  support.     They 
might  be,  and  a  great  many  of  them  were,  issued  without  any 
provision  for  their  redemption.     The  amount  of  their  notes 
outstanding  in  1811,  as  estimated  by  Mr.  Gallatin,  equalled 
$22,700,000 ;  those  of  the  Bank  of  the  United  States,  $5,400,000 : 
making  a  total  of  $28,100,000.     The  amount  of  notes  of  the 
State  Banks  outstanding  in  1816  was  estimated  by  Mr.  Craw- 
ford, Secretary  of  the   Treasury,  at  the    time   of  his   report 
upon  the  "  currency,"  under  date   of  Feb.  12,  1820,  made  in 
obedience  to  a  resolution  of  the  House  of    Representatives 
passed  March  1st,  1819,  at  $110,000,000.2     xhese  notes  were 

1  "A  Committee  of  the  Senate  of  Pennsylvania,  appointed  in  December,  1819, 
to  inquire  into  the  extent  and  causes  of  the  present  general  distress,  ascribed  it 
to  the  improvident  creation  of  so  many  Banks,  as  will  appear  from  the  following 
extract  from  their  report :  — 

"  '  At  the  following  session,  the  subject  was  renewed  with  increased  ardor ;  and 
a  bill  authorizing  the  incorporation  of  forty-one  banking  institutions,  with  capitals 
amounting  to  upwards  of  $17,000,000,  was  passed  by  a  large  majority.  This 
bill  was  also  returned  by  the  Governor,  with  additional  objections ;  but,  two  thirds 
of  both  houses  (many  members  of  which  were  pledged  to  their  constituents  to 
that  effect)  agreeing  on  its  passage,  it  became  a  law  on  the  21st  of  March,  1814 ; 
and  thus  was  inflicted  upon  the  Commonwealth  an  evil  of  a  more  disastrous  nature  than 
has  ever  been  experienced  by  its  citizens.  Under  tiiis  law,  thirty-seven  Banks,  four  o( 
which  were  established  in  Philadelphia,  actually  went  into  operation.'  "  —  Consid- 
siderations  on  the  Currency,  by  Albert  Gallatin,  p.  60. 

2  Mr.  Gallatin,  in  his  "  Considerations  upon  the  Currency,"  writtea  in  1830, 


KEW  CHARTER  GRANTED.  485 

depreciated  all  the  way  from  10  to  30  per  cent,  and  were 
constantly  declining  in  value.  No  wonder  that  the  nation 
stood  appalled  at  the  thought  of  the  volcano  beneath  its  feet, 
which  might  at  any  moment  burst  forth  and  overwhelm  gov- 
ernment and  people  in  a  common  ruin.  By  universal  consent, 
the  only  mode  of  escape  was  another  Bank  of  the  United 
States.  The  memory  of  the  advantages  secured  by  the  former 
was  still  fresh  in  the  minds  of  all.  For  the  instant,  in  the 
face  of  a  supreme  necessit}^,  Jefferson  and  his  construction 
were  wholly  forgotten.  Hamilton  was  again  in  the  ascendent. 
With  the  approbation  of  Mr.  Madison,  then  President  of  the 
United  States,  who  had  been  one  of  the  most  determined 
opponents,  upon  constitutional  grounds,  of  the  old  Bank,  and 
who  delivered  in  Congress  the  ablest  argument  made  on  his 
side  of  the  question,  a  bill  was  brought  in.  This  was  vetoed 
by  him,  not  from  the  unconstitutionality  of  the  proposed 
measure,  —  that,  he  said,  ha-^dng  been  finally  disposed  of  by 
repeated  precedents  of  the  government,  and  of  the  tribunal 
of  last  resort  in  the  interpretation  of  the  Constitution  (the 
Supreme  Court  of  the  United  States), — but  for  the  reason  that 
it  was  not  properly  adapted  to  its  objects.  The  bill  was 
vetoed  too  late  in  the  session  to  allow  time  for  maturing  an- 
other. At  the  following  session,  one  was  brought  in  and 
passed  ;  receiving  the  signature  of  the  President  on  the  10th 
of  April,  1816.  The  capital  of  the  Bank  was  increased  to 
$35,000,000.  Like  that  of  the  jjrevious  one,  its  charter  was  to 
run  for  twenty  years.  When  the  first  Bank  was  chartered, 
there  were  but  three  State  Banks  in  operation,  whose  joint 
capital  did  not  exceed  82,000,000.  They  had  been  prudently 
conducted,  and  the  currency  was  in  a  sound  condition.  This, 
at  the  time,  consisted  cliiefl}'  of  specie.  The  new  Bank,  con- 
sequently, was  only  an  additional  instrument  in  advancing 
the  general  prosperity.  As  its  loans  were  confined  to  the 
discount  of  bills,  they  could  not  be  made  in  excess.  New 
State  Banks  were  created  from  time  to  time,  as  called  for  by 
the  wants  and  the  increasing  business  operations  of  the  country. 
There  does  not  appear  to  have  been  any  excessive  issue  or 
speculative  movement  of  any  considerable  magnitude  during 

estimates  the  amount  of  the  notes  of  the  State  Banks  in  circulation  in  1816  at 
$68,000,000.  He  gives  no  reason  for  differing  so  widely  from  Mr.  Crawford, 
who  certainly  was  in  a  position  to  be  the  better  informed  of  the  two. 


486       CURRENCY  AND   BANKING   IN   THE   UNITED    STATES. 

the  whole  period  of  the  existence  of  the  first  Bank.      This 
was  the  brightest  and  most  satisfactory  one  in  the   financial 
history  of  the  nation.      The  system  in  operation  was  based 
upon  the  soundest  principles,  and  conducted  in  the  most  prudent 
and  competent  manner.     When  the  second  Bank  went  into 
operation,  the  fountains  of  the  great  deep  had  been  broken  up. 
In  the  frenzy  for  paper  money,  it  was  as  if  a  vast  mob,  guided 
by   the  most  lawless  impulses,  had  taken  possession   of  the 
land,  had  subverted  all  law  and  order,  and  well-nigh  its  moral 
and  material  prosperity.     Such  was   the  condition  of  affairs 
which  the  second  Bank  was  created  to  remedy.     It  went  man- 
fully to  work  ;  but  the  very  foundations  for  a  proper  system  of 
currency  had  to  be  laid.     The  paper  money  of  the  State  Banks 
had  driven  the  greater  part  of  the  specie  out  of  the  country. 
As  speedily  as  possible,  and  in  less  than  two  years,  the  Bank 
brought  back  87,311,750  from  Europe,  to  serve  as  its  reserves, 
—  at  a  loss,  including  interest,  of  8525,247.     It  could  not,  how- 
ever, hope  for  permanent  success,  unless  the  monetary  condi- 
tion was  in  a  measure  restored.     For  that  purpose,  it  undertook 
to   help   such   Banks  as  were  deserving   of  aid.     One  great 
obstacle  in  the  way  of  resumption  by  the  State  Banks  was 
their  indebtedness  to  the  government,  arising  out  of  a  deposit 
of  the  public  money  and  unpaid  proceeds  of  loans,  the  only 
means  for  the  discharge  of  which  was  their  depreciated  paper. 
The  United  States  Bank  assumed  such  debts  to  the  amount  of 
810,807,410 ;  of  which,  83,336,491  were  in  the  form  of  special 
deposits,  giving  a  credit  to  the  State  Banks  sufficient  for  the 
realization  of  their  assets.     By  such  measures,  progress  was 
steadily  made;  so  that  by  1820  most  of    the  Banks  in  the 
Eastern  States  had  resumed.     The  United  States  Bank,  at  the 
same  time,  undertook  to  extend  large  accommodations  to  South- 
ern and  Western  States  which  were  without  any  adequate 
system  of  their  own  ;  in  consequence  of  which  it  made  very 
heavy  losses.     It  also  made  a  loss,  soon  after  it  went  into 
operation,  of  81,671,221,  by  the  mismanagement  of  the  Balti- 
more branch.     The  total  losses  made  within  two  years  after 
it  went  into  operation  were  estimated  at  83,500,000.     These, 
together   with  the  extensions  of  loans  it   was   compelled   to 
make,  so  very  seriously  crippled  it  that  grave  apprehensions 
were  at  one  time  felt  that  it  would  be  compelled  to  suspend. 
It,  however,  weathered  the  storm,  and  gradually  worked  itself 


rNTLATIOJ^   OF   THE   CURRENCY  IN   1816.  487 

into  a  satisfactory  position.      In  no  single    instance,    either 
at  the  Bank  or  at  any  one  of  its  branches,  was  specie  ever 
refused  upon  notes  or  deposits.      It  could,   however,  by  no 
means  arrest  the  passion  for  new  Banks,  —  particularly  in  the 
Southern  and  Western  States,  which  still  continued  to  create 
them  by  scores,  only  to  disappear  after  an  ephemeral  existence, 
but  not  till  after  they  had  flooded  the  country  with  worthless 
paper.      The  consequences  of  such  inflation,  with  the  neces- 
sary contraction,  were   sought  to  be  met  by  the  States  with 
stay-laws,  and  other  expedients  to  prevent  the  seizure  by  law, 
and  the  sacrifice  of  property.     A  brief  sketch  of  the  banking 
system  or  operations  of  the  State  of  Kentucky  will  suffice  for 
the  whole.     In  1802,  that  State  chartered  a  Bank  at  Lexing- 
ton, with  a  capital  of  8150,000.     In  1803,  this  was  followed  by 
the  Bank  of  Kentucky,  with  a  capital  of  11,000,000.     These 
Banks  appear  to  have  been  well-managed  and  prosperous.     In 
1815,  the  State  caught  the  prevailing  mania,  and  increased  the 
capital  of  the  Bank  of  Kentucky  to  83,000,000,  with  power  to 
create  thirteen  branches,  of  which  seven  went  speedily  into 
operation.     In  1818,  forty-three  new  Banks  were  chartered, 
the  greater  part  of  which  went  into  operation.      These,  for 
some  time,  made  a  show  of  pajdng  specie  ;  but  soon  they  all 
suspended,  as  well  as  the  Bank  of  Kentucky,  which  again 
undertook  to  resume  in  1819,  and  continued  nominally  to  pay 
specie  for  about  a  year.     In  the  general  crash  which  followed, 
the  common  expedient,  "  stay-laws,"  was  resorted  to.     To  its 
credit,  the  Court  of  Appeals  —  the  highest  legal  tribunal  in  the 
State — pronounced  these  laws  unconstitutional.     The  people, 
however,  were  by  no  means  to  be  balked.     Through  the  legis- 
lature, which  they  controlled,  they  established  a  new  Court  of 
Appeals,  composed  of  judges  known  to  be  in  favor  of  sustain- 
ing the  laws.     The  State  at  once  divided  into  two  most  ran- 
corous parties.     That  favorable  to  the  stay-laws  and  the  new 
Court  remained  dominant  until  1826,  when  the  opposing  party 
got  the  upper  hand,  reversing  the  action  of  the  one  preceding 
it ;  but  not  until  almost  infinite  mischief  had  been  done,  both 
to  the  moral  and  material  welfare  of  the  State.     By  the  time 
that  reason   had  resumed   its   sway,  the    Banks   had   almost 
wholly  disappeared.     Not  a  trace  of  them  was  to  be  found  in 
1830.     Mr.  Gallatin,  in  his  pamphlet  on  the  currency,  puts  the 
number  of  Banks  which  failed  in  this  State  between  1811  and 


488      CURRENCY  AND   BANKING  IN  THE  UNITED    STATES. 

1830,  at  forty-tliree.  He  was  able  to  ascertain  the  capital  of 
only  nineteen,  which  amounted  in  the  aggregate  to  $6,297,730. 
The  total  capital  of  all  the  Banks  probably  equalled  $10,000,000. 
Their  circulation  and  deposits  at  one  time  probably  equalled 
their  capital.  Such  was  the  paper-money  debauch  in  that 
State.  A  corresponding  exhaustion  followed.  In  all  this, 
Kentucky  only  stood  for  an  example  of  Western  and  Southern 
States ;  and  shows  the  perilous  sea  upon  which  the  second 
Bank  of  the  United  States  was  launched,  and  from  which  it 
barely  escaped  complete  shipwreck. 

In  estimating  the  causes  of  financial  disturbance  in  the 
United  States,  the  condition  of  affairs  and  the  influences  at 
work  in  other  countries  are  always  to  be  carefully  considered. 
During  the  whole  period,  from  1791  to  1811,  Europe  was  con- 
vulsed by  wars,  which  created  a  market  at  high  rates  for  all 
the  more  important  products  of  this  country,  and  gave  active 
employment  to  her  merchant  shipping.  The  "balance  of 
trade,"  for  almost  the  whole  period,  continued  largely  in  its 
favor,  and  brought  into  it  plentiful  supplies  of  coin.  In  1816, 
peace  was  restored  to  Europe,  in  consequence  of  which  the 
factitious  advantages  previously  enjoyed  by  the  United  States 
were  almost  wholly  lost.  Thenceforth  the  financial  and  com- 
mercial condition  of  the  country  was  greatly  affected  by  that 
of  others.  The  period  in  England  from  1816  to  1826  was 
the  most  disturbed  and  unsatisfactory  in  her  financial  history. 
Resumption  there,  as  in  the  United  States,  caused  an  excessive 
contraction,  to  be  followed  by  great  speculative  movements, 
which  culminated  in  1826,  —  a  year  alike  memorable  in  both 
countries  for  great  commercial  disasters.  The  Bank  of  Eng- 
land resumed  in  1821.  At  that  time  it  seemed  sufficiently 
strong  to  defy  all  assault.  The  resumption  of  specie  pay- 
ment, and  the  apparent  restoration  of  its  material  interests, 
was  followed  in  that  country  by  a  mania  for  Banks,  as  wide- 
spread and  intense  as  any  that  ever  prevailed  in  the  United 
States.  The  consequences  were  the  same  in  that  country  as 
in  this.  Great  numbers  of  Banks  failed,  and  the  Bank  of 
England  itself  appeared  to  be  brought  to  the  very  brink  of 
ruin.  As  the  greatest  achievement  of  society  is  the  effecting 
of  its  exchanges  by  symbols,  —  by  the  representatives  of  the 
articles  exchanged,  —  so  the  greatest  wrong  it  can  do  to  itself 


GENERAL  JACKSON'S   FIRST   ATTACK  ON   THE  BANK.      489 

is  to  sever  the  symbol  from  the  constituent,  or  to  accept  that  as 
money  which  has  none,  either  in  merchandise  or  coin.  With 
such  a  currency,  society  is  in  the  condition  of  one  whose  will 
exerts  no  control  over  his  acts.  The  more  violent  his  action, 
the  greater  the  harm  to  which  he  inevitably  comes.  Experi- 
ence has  shown  that  ten  years  is  a  very  short  period  in  which 
to  recover  from  the  effects  of  an  excessive  and  long-continued 
indulgence  in  the  use  of  paper  money  which  is  severed  from 
capital.  Hence  the  criminality  of  those  who  wantonly  tamper 
with  the  currency,  or  who  are  instrumental  in  the  imposition 
of  a  fictitious  one. 

The  nation  had  hardly  recovered  from  the  disasters  conse- 
quent upon  the  refusal  to  recharter  the  old  Bank,  than  came 
the  announcement  of  General  Jackson,  in  his  first  Annual 
Message,  that :  — 

"  Both  the  constitutionality  and  the  expediency  of  the  law  creat- 
ing this  Bank  are  well  questioned  by  a  large  portion  of  our  fellow- 
citizens,  and  it  must  be  admitted  by  all  that  it  has  failed  in  the 
great  end  of  establishing  a  uniform  and  sound  currency. 

"  Under  these  circumstances,  if  such  an  institution  is  deemed 
essential  to  the  fiscal  operations  of  the  government,  I  submit  to  the 
wisdom  of  the  legislature  whether  a  national  one,  founded  upon 
the  credit  of  the  government  and  its  revenues,  migbt  not  be  de- 
vised, which  would  avoid  all  constitutional  difficulties,  aud,  at  the 
same  time,  secure  all  the  advantages  to  the  government  and  coun- 
try that  were  expected  to  result  from  the  present  Bank." 

This  announcement  created  all  the  astonishment  of  a  clap 
of  thunder  in  a  cloudless  sky.  It  was  received  with  mingled 
feelings  of  indignation,  ridicule,  and  contempt.  The  Bank 
had  never  stood  higher  in  popular  estimation.  The  question 
of  its  constitutionality  was  supposed  to  have  been  for  ever  set 
at  rest.  The  attack  did  not  excite  alarm,  as  it  was  believed 
that  it  would  be  utterly  futile,  in  view  of  the  experience  and 
precedent  of  the  past.  By  the  usual  courtesy,  that  part  of 
the  message  relating  to  the  Bank  was  referred  to  the  Commit- 
tee of  Ways  and  Means  of  the  House  ;  consisting  of  Mr.  Mc- 
Dufiie,  of  South  Carolina,  the  chairman,  Mr.  Verplanck,  of 
New  York,  j\Ir.  Dwight,  of  Massachusetts,  Mr.  Smyth,  of 
Virginia,  Mr.  Ingersoll,  of  Connecticut,  Mr.  Gilmore,  of  Penn- 
sylvania, and  Mr.  Overton,  of  Louisiana.     A  large  majority  of 


490      CUEEENCY   AND    BANKING  IN   THE   UNITED    STATES. 

the  Committee  was  friendly  to  tlie  administration,  as  were 
two-thirds  of  the  House.  As  the  greater  number  of  which 
the  Committee  was  composed  were  personally  familiar  with 
the  operations  of  both  Banks,  of  the  period  between  the  two, 
and  with  all  the  political  and  material  questions  involved ; 
and  as  these  were  discussed  with  a  fulness,  ability,  and  con- 
clusiveness never  surpassed  in  the  discussion  of  a  similar  sub- 
ject in  this  or  any  other  country  ;  and  as  we  must  yet  return 
to  a  National  Bank,  founded  on  the  model  of  Hamilton,  before 
we  can  hope  to  restore  the  financial  condition  of  the  country,  — 
copious  extracts  are  given  from  the  report  of  the  Committee, 
not  only  for  the  information  they  contain,  but  for  the  reason 
that  they  carry  much  more  force  than  would  any  summary  or 
abstract. 

"  There  are  few  subjects,"  says  the  report,  "  having  reference  to 
the  policy  of  an  established  government,  so  vitally  connected 
with  the  health  of  the  body  politic,  or  in  which  the  pecuniary  in- 
terests of  society  are  so  extensively  and  deeply  involved.  No  one 
of  the  attributes  of  sovereignty  carries  with  it  a  more  solemn 
responsibility,  or  calls  in  requisition  a  higher  degree  of  wisdom, 
than  the  power  of  regulating  the  common  currency,  and  thus  fixing 
the  general  standai-d  of  value  for  a  great  commercial  community 
composed  of  confedei-ated  States. 

"  Such  being,  in  the  opinion  of  the  Committee,  the  high  and 
delicate  trust  exclusively  committed  to  Congress  by  the  Federal 
Constitution,  they  have  proceeded  to  discharge  the  duty  assigned 
to  them,  with  a  corresponding  sense  of  its  magnitude  and  difficulty. 

"  The  most  simple  and  obvious  analysis  of  the  subject,  as  it  is 
presented  by  the  Message  of  the  President,  exhibits  the  following 
questions  for  the  decision  of  the  National  Legislature  :  — 

"  1.  Has  Congress  the  constitutional  power  to  incorporate  a 
Bank,  such  as  that  of  the  United  States? 

"2.  Is  it  expedient  to  establish  and  maintain  such  an  institution? 

"  3.  Is  it  expedient  to  establish  a  National  Bank,  founded  upon 
the  credit  of  the  government  and  its  revenues  ? 

"  If  the  concurrence  of  all  tiie  departments  of  the  government 
at  different  periods  of  our  history,  under  every  administration,  and 
during  the  ascendency  of  both  the  great  political  parties  into  which 
the  country  was  divided,  soon  after  the  adoption  of  the  present 
constitution,  shall  be  regarded  as  having  the  authority  ascribed  to 
such  sanctions  by  the  common  consent  of  all  weU-regulated  com- 
munities, the  constitutional  power  of  Congress  to  incorporate  a 
Bank  may  be  assumed  as  a  postulate  no  longer  open  to  controversy. 
In  little  more  than  two  years  after  the  government  went  into  opera- 
tion, and  at  a  period  when  most  of  the  distinguished  members  of  the 
Federal  Convention  were  either  in  the  executive  or  legislative 
councils,  the  Act  incorporating  the  first  Bank  of  the  United  States 


BEPORT   OF  THE  COISIMITTEE   OF   1831.  491 

passed  both  branches  of  Congress  by  large  majorities,  and  received 
the  deliberate  sanction  of  President  Washington,  who  had  then 
recently  presided  over  the  deliberations  of  the  Convention.  The 
constitutional  power  of  Congress  to  pass  the  Act  of  Incorporation 
was  thoroughly  investigated,  both  in  the  executive  cabinet  and  in 
Congress,  under  circumstances  in  all  respects  propitious  to  a  dis- 
passionate decision.  There  was,  at  that  time,  no  organization  of 
political  parties ;  and  the  question  was,  therefore,  decided  by  those 
who,  from  their  knowledge  and  experience,  wei'e  peculiarly  qualified 
to  decide  correctly,  and  who  were  entirely  free  from  the  influence 
of  that  party  excitement  and  prejudice  which  would  justly  im])air, 
in  the  estimation  of  posterity,  the  authority  of  a  legislative  inter- 
pretation of  the  constitutional  charter.  No  persons  can  be  more 
competent  to  give  a  just  construction  to  the  Constitution  than 
those  who  had  a  principal  agency  in  framing  it ;  and  no  administra- 
tion can  claim  a  more  perfect  exemption  from  all  those  influences 
which  sometimes  pervert  the  judgments  even  of  the  most  wise 
and  patriotic,  than  that  of  the  Father  of  his  Country  during  the 
first  term  of  his  service. 

"  Such  were  the  circumstances  under  which  all  the  branches  of  the 
National  Legislature  solemnly  determined  that  the  power  of  ci-eat- 
ing  a  National  Bank  was  vested  in  Congress  by  the  Constitution. 
The  Bank,  thus  created,  continued  its  operations  for  twenty  years, 
—  the  period  for  Avhich  its  charter  was  granted;  during  which 
time  public  and  private  credit  were  raised  from  a  prostrate  to  a 
very  elevated  condition,  and  the  finances  of  the  nation  were  placed 
upon  the  most  solid  foundation. 

"  When  the  charter  expired,  in  1811,  Congress  refused  to  renew 
it;  principally  owing,  as  the  Committee  believe,  to  the  then  existing 
state  of  political  parties.  Soon  after  the  Bank  was  chartered,  the 
two  great  parties  that  have  since  divided  the  country  began  to 
assume  an  organized  existence.  Mr.  Jefferson  and  Mr.  Madison, 
the  former  in  the  executive  cabinet  and  the  latter  in  Congress, 
had  been  opposed  to  the  establishment  of  the  Bank,  on  constitu- 
tional grounds  ;  and,  being  placed  at  the  head  of  the  party  most 
unfavorable  to  the  extension  of  the  powers  of  the  government  by 
implication,  the  bank  question  came  to  be  regarded  as  in  some 
degree  the  test  of  political  principles. 

"  When  Mr.  Jefferson  came  into  power,  upon  the  strong  tide  of 
a  political  revolution,  the  odium  of  the  Alien  and  Sedition  Laws 
was  in  part  communicated  to  the  Bank  of  the  United  States ;  and, 
although  he  gave  his  oflicial  sanction  to  an  Act  creating  a  new 
branch  of  that  institution  at  New  Orleans,  and  to  another  to  punish 
the  counterfeiting  of  its  bills,  yet,  when  the  question  of  renewing 
the  charter  came  before  Congress,  it  was  discussed  as  a  party 
question.  And,  though  some  of  the  most  distinguished  Republi- 
cans—  including  Mr.Gallatin,  then  Secretary  of  the  Treasury,  and 
Mr.  Crawford,  then  a  member  of  the  Senate  —  were  decidedly  in 
favor  of  the  renewal,  sustaining  the  measure  by  able  arguments, 
the  votes  in  both  branches  of  Congress  were  distinctly  marked  as 
party  votes.  .  .  . 


492      CURRENCY  AND   BANKING   IN  THE   UNITED   STATES. 

"  In  less  than  two  years  after  the  expiration  of  the  charter,  —  the 
•war  with  Great  Britain  having  taken  place  in  the  mean  time,  —  the 
circulating  medium  became  so  disordered,  the  public  finances  so 
deranged,  and  the  public  credit  so  impaired,  that  the  enlightened 
patriot,  Mr.  Dallas,  who  then  presided  over  the  Treasury  Depart- 
ment, with  the  sanction  of  Mr.  Madison,  and  as  it  is  believed 
every  member  of  the  Cabinet,  recommended  to  Congress  the  estab- 
lishment of  a  National  Bank,  as  the  only  measure  by  which  the 
public  credit  could  be  revived  and  the  fiscal  resources  of  the 
government  redeemed  from  a  ruinous  and  otherwise  incurable 
embarrassment ;  and  such  had  been  the  impressive  lesson  taught  by 
a  very  brief  but  fatal  experience,  that  the  very  institution  which 
had  been  so  recently  denounced  and  rejected  by  the  Republican  " 
[Democratic]  "  party,  being  now  recommended  by  a  Republican  " 
[Democratic]  "  administration,  was  carried  through  both  branches 
of  Congress,  as  a  Republican  "  [Democratic]  "  measure,  by  an  over- 
whelming majority  of  the  Republican  party.  It  is  true  that  Mr. 
Madison  did  not  approve  and  sign  the  bill  which  passed  the  two 
Houses,  because  it  was  not  such  a  bill  as  had  been  recommended 
by  the  Secretary  of  the  Treasury,  and  because  the  Bank  it  jiro- 
posed  to  create  was  not  calculated,  in  the  opinion  of  the  President, 
to  relieve  the  necessities  of  the  country.  But  he  premised  his 
objections  to  the  measure  'by  waiving  the  constitutional  authority 
of  the  legislature  to  establisli  an  incorporated  Bank,  as  being  ]ire- 
cluded,  in  his  opinion,  by  repeated  recognitions,  under  varied  cir- 
cumstances, of  the  valiciity  of  such  an  institution,  in  Acts  of 
the  legislative,  executive,  and  judicial  branches  of  the  govern- 
ment, accompanied  by  indications,  in  different  modes,  of  a  con- 
currence of  the  general  will  of  the  nation.'  Another  bill  was 
immediately  introduced  ;  and  would,  in  all  probability,  have  become 
a  law,  had  not  the  news  of  peace,  by  doing  away  the  pressure  of 
the  emergency,  in<luced  Congress  to  suspend  further  proceedings 
on  the  subject  until  the  ensuing  session.  At  the  commencement 
of  that  session,  Mr.  Madison  invited  the  attention  of  Congress  to 
the  subject ;  and  Mr.  Dallas  again  urged  the  necessity  of  establish- 
ing a  Bank,  to  restore  the  currency,  and  facilitate  the  collection 
and  disbursement  of  the  public  revenue  ;  and  so  deep  and  solemn 
■was  the  conviction  upon  the  minds  of  tlie  public  functionaries  that 
such  an  institution  was  the  only  practicable  means  of  restoring  the 
circulating  medium  to  a  state  of  soundness,  that,  notwithstanding 
the  decided  opposition  of  all  the  State  Banks  and  their  debtors, — 
atid,  indeed,  the  whole  debtor  class  of  the  comiuiniity,  —  the  Act  in- 
corporating the  present  Bank  of  the  United  States  was  passed  by 
considerable  majorities  in  both  branches  of  Congress,  and  approved 
by  Mr.  Madison. 

"This  brief  history  of  the  former  and  present  Bank  forcibly 
suggests  a  few  practical  reflections.  It  is  to  be  remarked,  in  the 
first  place,  that,  since  the  adoption  of  the  Constitution,  a  Bank  has 
existed,  under  the  authority  of  the  Federal  Government,  for  thirty- 
three  out  of  forty  years ;  during  which  time,  public  and  private 
credit  have  been  maintained  at  an  elevation  fully  equal  to  what  has 


REPORT   OF    THE   COMMITTEE   OF  1831.  493 

existed  in  any  nation  in  the  world :  whereas,  in  the  two  short  inter- 
vals during  which  no  National  Bank  existed,  public  and  private 
credit  were  greatly  impaired,  and,  in  the  latter  instance,  the  fiscal 
operations  of  the  government  were  almost  entirely  arrested.     In 
the  second  place,  it  is  worthy  of  special  notice,  that,  in  both  the 
instances  iu  which  Congress  has  created  a  Bank,  it  has  been  done 
under  circumstances  calculated  to  give  the  highest  authority  to  the 
decision.     The  first  instance,  as  has  already  been  remarked,  was  in 
the  primitive  days  of  the  Republic,  when  the  patriots  of  the  Revo- 
lution and  the  sages  of  the  Federal  Convention  were  the  leading 
members  both  of  the  executive  and  legislative  councils,  and  when 
General  Washington,  who  at  the  head  of  her  armies  had  conducted 
his  country  to  independence,  and  at  the  head  of  the  Convention 
had  presided  over  those  deliberations  which  resulted  in  the  estab- 
lishment of  the  present  Constitution,  was  the  acknowledged  Presi- 
dent of  a   people  undistracied   by  party  divisions.     The  second 
instance  was  under  circumstances  of  a  very  different,  but  equally 
decisive,  character.     We  find  the  very  party  which  had  so  recently 
defeated  the  proposition  to  renew  the  charter  of  the  old  Bank, 
severely  schooled  both  by  adversity  and  experience,  magnanimously 
sacrificing  the  pride  of  consistency  and  the  prejudices  of  party  at 
the  shrine  of  j^atriotism.     It  may  be  said,  without  disparagement, 
that  an  assembly  of  liigher  talent  and  purer  patriotism  has  never 
existed    since  the  days  of  the  Revolution  than    the  Congress  by 
which  the  present  Bank  was  incorporated.     If  ever  a  political  party 
existed,  of  which  it  might  be  truly  said  that  '  all  the  ends  they 
aimed  at  were  their  country's,'  it  was  the  Republican  "  [Democratic] 
"  party  of  that  day.     They  had  just  conducted  the  country  through 
the  perils  of  a  war  waged  in  defence  of  her  rights  and  honor ;  and, 
elevating  their  views  far  above  the  narrow  and  miserable  ends  of 
party  strife,  sought  only  to  advance  the  permanent  happmess  of  the 
people.     It  was  to  this  great  end  that  they  established  the  present 
Bank. 

"  In  this  review,  it  will  be  no  less  instructive  than  curious  to 
notice  some  of  the  changes  made  in  the  opinions  of  prominent  men, 
yielding  to  the  authority  of  experience.  Mr.  Madison,  who  was  the 
leading  opponent  of  the  Bank  created  in  1791,  recommended  and 
sanctioned  the  Bank  created  in  1816;  and  Mr.  Clay,  who  strenu- 
ously opposed  the  renewal  of  the  charter  in  1811,  as  strenuously 
supported  the  proposition  to  grant  the  charter  in  1816. 

"  That  may  be  said  of  the  Bank  charter  which  can  be  said  of  few 
contested  questions  of  constitutional  power.  Both  the  great  polit- 
ical parties  that  have  so  long  directed  the  country  have  declared 
it  to  be  constitutional,  and  there  are  but  very  few  of  the  prominent 
men  of  either  party  who  do  not  stand  committed  in  its  favor. 
When  to  this  imposing  array  of  authorities  the  Committee  add  the 
solemn  and  unanimous  decision  of  the  Supreme  Court,  in  a  case 
which  fully  and  distinctly  submitted  the  constitutional  question  to 
their  cognizance,  may  they  not  ask,  in  the  language  of  Mr.  Dallas, 
'  Can  it  be  deemed  a  violation  of  the  right  of  private  opinion  to 
consider  the  constitutionality  of  a  National  Bank  as  a  question  for 
ever  settled  and  at  rest  ? '  .  .  . 


494      CURRENCY   AISTD   BANKING   IN   THE   UNITED    STATES. 

"  The  earliest  and  the  principal  objection  urged  against  the  con- 
stitutionality of  a  National  Bank  was  that  Congress  had  not  the 
power  to  create  corporations.  That  Congress  has  a  distinct  and 
substantive  power  to  create  corporations,  without  reference  to  the 
objects  intrusted  to  its  jurisdiction,  is  a  proposition  which  never 
has  been  maintained,  within  the  knowledge  of  the  Committee ;  but 
that  any  one  of  the  powers  expressly  conferred  upon  Congress  is 
subject  to  the  limitation,  that  it  shall  not  be  carried  into  effect  by 
the  agency  of  a  corporation,  is  a  proposition  which  cannot  be  main- 
tained, in  the  opinion  of  the  Committee. 

"  If  Congress,  under  the  authority  to  j^ass  all  Imos  necessary  and 
proper  for  carrying  into  effect  the  powers  vested  in  all  or  any  of 
the  departments  of  the  government,  may  rightfully  pass  a  law 
inflicting  the  punishment  of  death,  without  any  other  authority^  it 
is  diflicult  to  perceive  why  it  may  not  pass  a  law,  under  the  same 
aiithority,  for  the  more  humble  purpose  of  creating  a  corporation. 
The  power  of  creating  a  corporation  is  one  of  the  lowest  attributes, 
or,  more  properly  speaking,  incidents  of  sovereign  power.  The 
chartering  of  a  Bank,  for  example,  does  not  authorize  the  corpora- 
tion to  do  any  thing  which  the  individuals  composing  it  might  not 
do  without  the  charter.  It  is  the  right  of  every  individual  of  the 
Union  to  give  credit  to  whom  he  chooses,  and  to  obtain  credit  where 
he  can  get  it.  It  is  not  the  policy  of  any  commercial  country  to 
restrict  the  free  circulation  of  credit,  whether  in  the  form  of  prom- 
issory notes,  bills  of  exchange,  or  bank-notes.  The  charter  of  the 
Bank  of  the  United  States,  therefore,  merely  enables  the  corpora- 
tion to  do  in  an  artificial  capacity,  and  with  more  convenience, 
what  it  would  be  lawful  for  the  individual  corporators  to  do  without 
incorporation.  .  .  . 

"  But  the  question  really  presented  for  their  determination  is 
not  between  a  metallic  and  a  paper  currency,  but  between  a  paper 
currency  of  uniform  value,  and  subject  to  the  control  of  the  only 
power  competent  to  its  regulation,  and  a  paper  currency  of  vary- 
ing and  fluctuating  value,  and  subject  to  no  common  or  adequate 
control  Avhatever.  On  this  question,  it  would  seem  that  there  could 
hardly  exist  a  difference  of  opinion ;  and  that  this  is  substantially 
the  question  involved  in  considering  the  expediency  of  a  National 
Bank,  will  satisfactorily  appear  by  a  comparison  of  the  state  of  the 
currency  previous  to  the  establishment  of  the  present  Bank  and  its 
condition  for  the  last  ten  years. 

"  Soon  after  the  expiration  of  the  charter  of  the  first  Bank  of  the 
United  States,  an  immense  number  of  local  Banks  sprung  up  under 
the  pecuniary  exigencies  produced  by  the  withdrawal  of  so  large 
an  amount  of  bank  credit  as  necessarily  resulted  from  the  winding 
up  of  its  concerns,  —  an  amount  falling  very  little  short  of  fifteen 
millions  of  dollars.  These  Banks,  being  entirely  free  from  the  salu- 
tary control  which  the  Bank  of  the  tlnited  States  had  recently 
exercised  over  the  local  institutions,  commenced  that  system  of 
imprudent  trading  and  excessive  issues  which  speedily  involved  the 
country  in  all  the  embarrassments  of  a  disordered  currency.  The 
extraordinary  stimulus  of  a  heavy  war  expenditure  derived  prin- 


REPORT   OF   THE   COMMITTEE   OF    1831.  495 

cipally  from  loans,  and  a  con-esponding  multiplication  of  local 
Banks,  chartered  by  the  double-score  in  some  of  the  States,  hastened 
the  catastrophe ;  which  must  have  occurred,  at  no  distant  period, 
without  those  extraordinary  causes.  The  last  year  of  the  war  pre- 
sented the  singular  and  melancholy  spectacle  of  a  nation  abounding 
in  resources,  a  people  abounding  in  self-devoted  patriotism,  and  a 
government  reduced  to  the  very  brink  of  avowed  Ijankruptcy  solely 
for  the  want  of  a  national  institution,  which,  at  the  same  time  that 
it  would  have  facilitated  the  government  loans  and  other  treasury 
operations,  would  have  furnished  a  circulating  medium  of  general 
credit  in  every  part  of  the  Union.  In  this  view  of  the  subject,  the 
Committee  are  fully  sustained  by  the  opinion  of  Mr.  Dallas,  then 
Secretary  of  the  Treasury,  and  by  the  concurring  and  almost  unani- 
mous opinion  of  all  parties  in  Congress;  for,  whatever  diversity  of 
opinion  prevailed  as  to  the  proper  basis  and  organization  of  a  Bank, 
almost  every  one  agreed  that  a  National  Bank  of  some  sort  was 
indispensably  necessary  to  rescue  the  country  from  the  greatest  of 
financial  calamities. 

"  The  Committee  will  now  present  a  brief  exposition  of  the  state 
of  currency  at  the  close  of  the  war;  of  the  injury  which  resulted 
from  it,  as  well  to  the  government  as  to  the  community ;  and  their 
reasons  for  belieWng  that  it  could  not  have  been  restored  to  a  sound 
condition,  and  cannot  now  be  preserved  in  that  condition,  without 
the  agency  of  an  institution  such  as  the  Bank  of  the  United  States, 

"  The  price  current  appended  to  this  report  will  exhibit  a  scale 
of  depreciation  in  the  local  currency,  ranging  through  various 
degrees  to  20,  and  even  to  25,  per  cent.  Among  the  principal 
Eastern  cities,  Washington  and  Baltimore  were  the  points  at  which 
the  depreciation  was  greatest.  The  paper  of  the  Banks  in  those 
places  was  from  20  to  22  per  cent  below  par.  At  Philadelphia,  the 
depreciation  was  considerably  less ;  though  even  there  it  was  from 
17  to  18  per  cent.  In  New  York  and  Charleston,  it  was  from  7  to 
10  per  cent.  But,  in  the  interior  of  the  country  where  Banks  were 
established,  the  depreciation  was  even  greater  than  at  Washington 
and  Baltimore.  In  the  Western  part  of  Pennsylvania,  and  particu- 
larly at  Pittsburgh,  it  was  25  per  cent.  These  statements,  however, 
of  the  relative  depreciation  of  bank  paper  at  various  i^laces,  as 
compared  with  specie,  give  a  very  inadequate  idea  of  the  enormous 
evil  inflicted  upon  the  community  by  the  excessive  issues  of  bank 
paper.  .  .  . 

"  A  very  serious  evil,  already  hinted  at,  which  grew  out  of  the 
relative  depreciation  of  bank  paper  at  the  different  points  of  impor- 
tation, was  its  inevitable  tendency  to  draw  all  the  importations  of 
foreign  merchandise  to  the  cities  where  the  depreciation  was  great- 
est, and  divert  them  from  those  where  the  currency  was  compara- 
tively sound.  If  the  Bank  of  the  United  States  had  not  been  estab- 
lished, and  the  government  had  been  left  without  any  alternative 
but  to  receive  the  depreciated  local  currency,  it  is  difficult  to 
imagine  the  extent  to  which  the  evasion  of  the  revenue  laws  would 
have  been  carried.  Every  State  would  have  had  an  interest  to 
encourage  the  excessive  issues  of  its  Banks  and  increase  the  degra- 


496       CUREENCY-  AND   BANKING  IN  THE   UNITED   STATES. 

dation  of  its  currency,  with  a  view  to  attract  foreign  conimerce. 
Even  in  the  condition  which  the  currency  had  reached  m  1816, 
Boston  and  New  York  and  Charleston  woukl  have  found  it  advan- 
tageous  to  derive  the  supplies  of  foreign  merchandise  through 
Baltimore;  and  commerce  would,  undoubtedly,  have  taken  that 
direction,  had  not  the  currency^  been  corrected.  To  avoid  this 
iniurious  diversion  of  foreign  imports,  Massachusetts  and  New 
York  and  South  Carolina  would  have  been  driven,  by  all  motives 
of  self-defence  and  self-interest,  to  degrade  their  respective  curren- 
cies, at  least  to  a  par  with  the  currency  of  Baltimore  ;  and  thus  a 
rivalry  in  the  career  of  depreciation  would  have  sprung  up  to  which 
no  limit  can  be  assigned.  As  the  tendency  of  this  state  of  things 
would  have  been  to  cause  the  largest  of  the  revenue  to  be  collected 
at  a  few  places,  and  in  the  most  depreciated  of  the  local  currency, 
it  would  have  followed  that  a  very  small  part  of  that  revenue  would 
have  been  disbursed  at  the  points  where  it  was  collected.  The 
government  would  consequently  have  been  compelled  to  sustain  a 
heavy  Joss  upon  the  transfer  of  its  funds  to  the  points  of  expendi- 
ture. The  annual  loss  which  would  have  resulted  from  these  causes 
alone  cannot  be  estimated  at  a  less  sum  than  $2,000,000. 

"  But  the  principal  loss  which  resulted  from  the  relative  deprecia- 
tion of  bank  paper  at  different  places,  and  its  want  of  general  credit, 
was  that  sustained  by  the  community  in  the  great  operations  of 
commercial  exchange.  The  extent  of  these  operations,  annually, 
may  be  safely  estimated  at  $60,000,000.  Upon  this  sum,  the  loss 
sustained  by  the  merchants  and  planters  and  farmers  and  manu- 
facturers was  probably  not  less  than  an  average  of  10  per  cent, 
being  the  excess  of  the  rate  of  exchange  between  its  natural  rate  in 
a  sound  state  of  the  currency,  and  beyond  the  rate  to  which  it  has 
been  actually  reduced  by  the  operations  of  the  Bank  of  the  United 
States.  It  will  be  thus  perceived  that  an  annual  tax  of  $6,000,000 
was  levied  from  the  industrious  and  productive  classes,  by  the  large 
moneyed  capitalists  in  our  commercial  cities  who  were  engaged  in 
the  business  of  brokerage.  ... 

"But  no  adequate  conception  can  be  formed  of  the  evils  of  a. 
depreciated  currency,  without  looking  beyond  the  relative  depreci- 
ation at  different  places  to  the  general  depreciation  of  the  entire 
mass.  It  appears  from  the  report  of  Mr.  Crawford,  the  Secretary 
of  the  Treasury,  in  1820,  that,  during  the  geueral_  suspension  of 
specie  payments  by  the  local  Banks  in  the  years  1815  and  1816,  the 
circulating  medium  of  the  United  States  had  reached  the  aggregate 
amount  of  $110,000,000,  and  that  in  the  year  1819  it  had  been  re- 
duced to  $45,000,000,  l)eing  a  reduction  of  59  per  cent  in  the  short 
period  of  four  years.  The  Committee  are  inclined  to  the  opinion, 
that  the  severe  and  distressing  operation  of  restoring  a  vicious 
currency  to  a  sound  state,  by  the  calling  in  of  bank  paper  and  the 
curtailment  of  bank  discounts,  had  carried  the  reduction  of  the  cur- 
rency, in  1819,  to  a  point  somewhat  lower  than  was  consistent  with 
the  just  requirements  of  the  community  for  a  circulating  medium  ; 
and  that  the  bank  discounts  have  been  gradually  enlarged  since 
that  time,  so  as  to  satisfy  those  requirements.     It  will  be  assumed, 


EEPORT   OF   THE   COlVOnTTEE   OF   1831.  497 

therefore,  tliat  the  circuhiting  medium  of  the  United  States  has 
been  $55,000,000  for  the  last  ten  years,  taking  the  average. 

"  Even  upon  this  assumption,  it  will  follow  that  the  national  cur- 
rency has  been  100  per  cent  more  valuable  for  the  last  ten  years 
than  it  was  in  1816.  In  other  words,  two  dollars  would  purchase 
no  more  of  any  commodity  in  1816  than  one  dollar  has  been  capable 
'of  purchasing  at  any  time  since  1817.  .  .  . 

"The  Committee  have  given  this  part  of  the  subject  an  attentive 
and  careful  examination  ;  and  they  cannot  estimate  the  pecuniary 
losses  of  the  government,  sustained  exclusively  for  the  want  of  a 
sound  currency  and  an  efficient  system  of  finance,  at  a  sum  less  than 
$46,000,000.  If  they  shall  make  this  apparent,  the  House  will  have 
something  like  a  standard  for  estimating  the  individual  losses  of 
the  community. 

"  The  government  borrowed,  during  the  short  period  of  the  war, 
$80,000,000,  at  an  average  discount  of  15  per  cent ;  giving  certificates 
of  stock  amounting  to  $80,000,000  in  exchange  for  $68,000,000  in 
such  bank  paper  as  could  be  obtained.  In  this  statement,  treasury 
notes  are  considered  as  stock  at  20  jDcr  cent  discount.  Upon  the 
very  face  of  the  transaction,  therefore,  there  was  a  loss  of 
$12,000,000,  which  would  in  all  probability  have  been  saved  if  the 
treasury  had  been  aided  by  such  an  institution  as  the  Bank  of  the 
United  States.  But  the  sum  of  $68,000,000  received  by  the  gov- 
ernment was  in  a  depreciated  currency,  not  more  than  half  as 
valuable  as  that  in  which  the  stock  given  in  exchange  for  it  has 
been  and  will  be  redeemed.  Here,  then,  is  another  loss  of 
$34,000,000,  resulting  incontestably  and  exclusively  from  the  de- 
preciation of  the  currency,  and  making,  with  the  sum  lost  by  the 
discount,  $46,000,000.  While,  then,  the  government  sustained  this 
great  pecuniary  loss  in  less  than  three  years  of  war,  amounting 
annually  to  more  than  the  current  expenses  of  the  government  in 
time  of  peace,  it  is  worth  while  to  inquire  Avho  were  the  persons 
who  profited  to  this  enormous  amount  by  the  dei'angement  of  the 
currency  ?  It  will  be  found  that  the  whole  benefit  of  this  specula- 
tion upon  the  necessities  of  the  government  was  realized  by  stock- 
jobbers and  money  brokers,  by  the  very  same  class  of  persons  who 
profited  so  largely  by  the  business  of  commei'cial  exchanges  in  con- 
sequence of  the  disorders  of  the  currency,  and  who  have  the  same 
interest  in  the  recurrence  of  those  disorders  as  lawyers  have  in  liti- 
o"ation,  or  physicians  in  the  diseases  of  the  human  frame.  Having 
presented  these  general  views  of  the  evils  which  existed  previous  to 
the  establishment  of  the  Bank  of  the  United  States,  it  remains  for 
the  Committee  to  inquire  how  far  this  institution  has  effected  a 
remedy  of  those  evils.  .  .  . 

"  It  has  been  already  stated  that  it  has  saved  the  community  from 
the  immense  losses  resulting  from  a  high  and  fluctuating  state  of 
the  exchanges.  It  now  remains  to  show  its  effect  in  equalizing  the 
currency.  In  this  respect,  it  has  been  productive  of  results  more 
salutary  than  were  anticipated  by  the  most  sanguine  advocates  of 
the  policy  of  establishing  the  Bank.  It  has  actually  furnished  a 
circulating  medium  m,ore  uniform,  than  specie.     This  proposition  is 

32 


498      CUKEENCY   AND   BANKING   IN   THE   UNITED   STATES. 

susceptible  of  the  clearest  demonstration.  If  the  whole  circulating 
medium  were  specie,  a  planter  of  Louisiana  who  should  desire  to 
purchase  merchandise  in  Philadelphia  would  be  obliged  to  pay  one 
per  cent  either  for  a  bill  of  exchange  on  this  latter  place,  or  for  the 
transportation  and  insurance  of  his  specie.  His  specie  at  New 
Orleans,  where  he  had  no  present  use  for  it,  would  be  worth  one 
per  cent  less  to  him  than  it  would  be  in  Philadelphia,  where  he  had 
a  demand  for  it.  But,  by  the  aid  of  the  Bank  of  the  United  States, 
one-half  of  the  expense  of  transporting  specie  is  now  saved  to  him. 
The  Bank,  for  one-half  of  one  per  cent,  will  give  him  a  draft  upon 
the  mother  Bank  at  Philadelphia,  with  which  he  can  draw  either 
the  bills  of  that  Bank  or  specie,  at  his  pleasure.  ... 

"For  all  the  purposes  of  the  revenue,  it  gives  to  the  national 
currency  that  perfect  uniformity,  that  ideal  perfection,  to  which  a 
currency  of  gold  and  silver  in  so  extensive  a  country  could  have  no 
pretensions.  A  bill  issued  at  Missouri  is  of  equal  value  with  specie 
at  Boston,  in  payment  of  duties ;  and  the  same  is  true  of  all  places, 
however  distant,  where  the  Bank  issues  bills  and  the  government 
collects  its  revenue.  When  it  is,  moreover,  considered  that  the 
Bank  performs,  with  the  most  scrupulous  punctuality,  the  stipula- 
tion to  transfer  the  funds  of  the  government  to  whatever  point  they 
may  be  wanted,  free  of  expense,  it  must  be  apparent  that  the  Com- 
mittee are  correct  to  the  very  letter  in  stating  that  the  Bank  has 
furnished,  both  to  the  government  and  to  the  people,  a  currency  of 
absolutely  wuform  value  in  all  places^  for  the  purposes  of  paying 
the  public  contributions  and  disbursing  the  public  revenue.  And, 
when  it  is  recollected  that  the  government  annually  collects  and 
disburses  more  than  $23,000,000,  those  who  are  at  all  familiar  with 
the  subject  will  at  once  perceive  that  bills,  which  are  of  absolutely 
uniform  value  for  this  vast  operation,  must  be  very  nearly  so  for  all 
the  purposes  of  general  commerce.  .  .  . 

"  But  the  salutary  agency  of  the  Bank  of  the  United  States,  in 
furnishing  a  sound  and  uniform  currency,  is  not  confined  to  that 
portion  of  the  currency  which  consists  of  its  own  bills.  One  of  the 
most  important  purposes  which  the  Bank  was  designed  to  accom- 
plish, and  which,  it  is  confidently  believed,  no  other  human  agency 
could  have  effected  under  our  federative  system  of  government, 
was  the  enforcement  of  specie  payments  on  the  part  of  numerous 
local  Banks  deriving  their  charters  from  the  several  States,  and 
whose  paper,  irredeemable  in  specie  and  illimitable  in  its  quantity, 
constituted  the  almost  entire  currency  of  the  country.  Amidst  a 
combination  of  the  greatest  difficulties,  the  Bank  has  almost  com- 
pletely succeeded  in  the  performance  of  this  arduous,  delicate,  and 
painful  duty.  With  exceptions  too  inconsiderable  to  merit  notice, 
all  the  State  Banks  in  the  Union  have  resumed  specie  payment. 
Their  bills,  in  the  respective  spheres  of  their  circulation,  are  of 
equal  value  with  gold  and  silver  ;  while,  for  all  the  operations  of 
commerce  beyond  that  sphere,  the  bills  or  the  checks  of  the  Bank 
of  the  United  States  are  even  more  valuable  than  specie.  And 
even  in  the  very  few  instances  in  which  the  ])aper  of  State  Banks 
is  depreciated,  these  Banks  are  winding  up  their  concerns ;  and  it 


REPORT   OF   THE   COMMITTEE   OF   1831.  499 

may  be  safely  said  that  no  citizen  of  the  Union  is  nnder  the  neces- 
sity of  taking  depreciated  paper,  because  a  sound  currency  cannot 
be  obtained.  North  Carolina  is  believed  to  be  the  only  State 
where  paper  of  the  local  Banks  is  irredeemable  in  specie,  and 
consequently  depreciated.  Even  there  the  depreciation  is  only  one 
or  two  percent;  and,  what  is  more  important,  the  paper  of  the 
Bank  of  the  United  States  can  be  obtained  by  all  those  who  desire 
it,  and  have  an  eqiiivalent  to  give  for  it. 

"  The  Committee  are  aware  that  the  opinion  is  entertained  by 
some  that  the  local  Banks  would,  at  some  time  or  othei*,  either 
voluntarily,  or  by  the  coercion  of  the  State  legislatures,  have  re- 
sumed specie  payments.  In  the  very  nature  of  things,  this  would 
seem  an  impossibility.  It  must  be  remembered  that  no  Banks  ever 
made  such  large  dividends  as  were  realized  by  the  local  institutions 
during  the  suspension  of  specie  payments.  A  rich  and  abundant 
harvest  of  profit  was  opened  to  them,  which  the  resumption  of 
specie  payments  must  inevitably  blast.  While  permitted  to  give 
their  own  notes,  bearing  no  interest  and  not  redeemable  in  specie, 
in  exchange  for  better  notes  bearing  interest,  it  is  obvious  that,  the 
more  paper  they  issued,  the  higher  would  be  their  profits.  The 
most  powerful  motive  that  can  operate  upon  moneyed  corporations 
would  have  existed  to  prevent  the  State  Banks  from  putting  an 
end  to  the  very  state  of  things  from  which  their  excessive  profits 
proceeded.  Their  very  nature  must  have  been  changed,  therefore, 
before  they  could  have  been  induced  to  co-operate  voluntarily  in 
the  restoration  of  the  currency.  It  is  quite  as  improbable  that  the 
State  legislatures  would  have  compelled  the  Banks  to  do  their  duty. 
It  has  already  been  stated  that  the  tendency  of  a  depreciated  cur- 
rency to  attract  importations  to  the  points  of  greatest  depreciation, 
and  to  lighten  the  relative  burdens  of  federal  taxation,  would  natu- 
rally produce  among  the  States  a  rivalry  in  the  business  of  excessive 
bank  issxies.  But  there  remains  to  be  stated  a  cause  of  more  gen- 
eral operation,  which  would  have  prevented  the  interposition  of 
the  State  legislatures  to  correct  those  issues. 

"  The  Banks  were,  directly  and  indirectly,  the  creditors  of  the 
whole  community ;  and  the  resumption  of  specie  payments  neces- 
sarily involved  a  general  curtailment  of  discounts  and  withdrawal 
of"  credit,  which  would  produce  a  general  and  distressing  pi'essure 
upon  the  higher  class  of  debtors.  These  constituted  the  largest 
portion  of  the  population  of  all  the  States  where  specie  pay- 
ments were  suspended  and  Bank  issues  excessive.  Those,  there- 
fore, who  controlled  public  opinion  in  the  States  where  the 
depi'eciation  of  the  local  paj^er  was  greatest  were  interested  in  the 
perpetuation  of  the  evil.  Deep  and  deleterious,  therefore,  as 
the  disease  evidently  was  in  many  of  the  States,  their  legislatures 
could  not  have  been  expected  to  apply  a  remedy  so  painful  as  the 
compulsion  of  specie  payments  would  have  been,  without  the  aid  of 
the  Bank  of  the  United  States.  And  here  it  is  worthy  of  special 
remark,  that,  while  that  Bank  has  compelled  the  local  Banks  to 
resume  specie  payments,  it  has  most  materially  contributed,  by  its 
direct  aid  and  liberal  arrangements,  to  enable  them  to  do  so,  and 


500      CURRENCY   AND   BANKING   IN   THE   UNITED    STATES. 

that  with  the  least  possible  erabaiTassment  to  themselves  and  dis- 
tress to  the  community.     If  the  State  legislatures  had  been  ever  so 
anxious  to  compel  the  Banks  to  resume  specie  payments,  and  the 
Banks  ever  so  willing  to  make  the  effort,  the  Committee  are  de- 
cidedly of  the  opinion  that  they  could  not  have  done  it,  unaided  by 
the  Bank  of  the  United  States,  without  producing  a  degree  of  dis- 
tress incomparably  greater  than    has    been  actually   experienced. 
They  will  conclude  their  remarks  on  this  branch  of  the  subject  by 
the  obvious  reflection,  that  if  Congress,  at  the  close  of  the  war, 
had  left  it  to  the  States  to  restore  the  disordered  currency,  this  im- 
portant function  of  sovereignty  would  have  been  left  with  those 
from  whom  the  Constitution  had  expressly  taken  it,  and  by  whom 
it  could  not  be  beneficially  or  effectually  exercised.     But  another 
idea,  of  considerable  plausibility,  is  not  without  its  advocates.     It 
is  said  that  this  government,  by  making  the  resumption  and  con- 
tinuance of  specie  payment  the  condition  upon  which  State  Banks 
should  receive  the  government  deposits,  might  have  restored  the 
currency  to  a  state  of  uniformity.     Without  stopping  to  give  their 
reasons  for  beUeving  that  specie  payments  could  not  have  been  re- 
stored in  this  way,  and  that,  even  if  they  could,  a  uniform  currency 
of  general  credit,  throughout  the  Union,  would  not  have  been  pro- 
vided, the  Committee  will  proceed  to  give  their  reasons  for  thinking 
that  such  a  connection  between  the  Federal  Government  and  the 
State  Banks  would  be  exceedingly  dangerous  to  the  purity  of  both. 
While  there  is  a  National  Bank,  bound  by  its  charter  to  perform 
certain  stipulated  duties,  and  entitled   to  receive  the  government 
deposits  as  a  compensation  fixed  by  the  law  containing  the  charter, 
and  only  to  be  forfeited  by  the  failure  to  perform  those  duties,  there 
is  nothing  in  the  connection  at  all  inconsistent  with  the  indepen- 
dence of  °the  Bank  and  the  purity  of  the  government.     The  coun- 
try  has   a  deep   interest   that   the  Bank   should   maintain   specie 
payments,  and  the  government  an  additional  interest  that  it  should 
keep  the  public  funds  safely,  and  transfer  them,  free   of  expense, 
wherever  they  may  be  wanted.     The  government,  therefore,  has 
no  power  over  the  Bank,  but  the  salutary  power  of  enforcing  a 
compliance  with  the  terms  of  its  charter.     Every  thing  is  fixed  by 
the  law,  and  nothing  is  left  to  arbitrary  discretion.     It  is  true  that 
the  Secretary  of  the  Treasury,  with  the    sanction  of    Congress, 
would  have  the  power  to  prevent  the  Bank  from  using  its  power 
unjustly  and  oppressively,  and  to  punish  any  attempt,  on  the  part 
of  the  Directors,  to  bring  the  pecuniary  influence  of   the  institu- 
tion to  bear  upon  the  politics  of  the  country,  by  withdrawing  the 
government  deposits  from  the  offending  branches.     But  this  power 
would   not   be   lightly   exercised  by   the  treasury,  as  its  exercise 
would  necessarily  be  subject  to  be  reviewed  by  Congress :  it  is  in 
its  nature  a  salutary  corrective,  creating  no  undue  dependence  on 
the  part  of  the  Bank. 

"  But  the  state  of  things  would  be  widely  different  if  there  was 
no  National  Bank,  and  it  was  left  to  the  discretion  of  the  Secretary 
of  the  Treasury  to  select  the  local  Banks  in  which  the  government 
deposits  should  be  made.     All  the  State  Banks  would,  in  that  case, 


KEPORT   OF   THE   COMMITTEE   OF    1831.  501 

be  comjictitors  for  the  favor  of  the  Treasury ;  and  no  one  who  will 
duly  consider  the  nature  of  this  sort  of  patronage  can  fail  to  per- 
ceive, that,  in  the  hands  of  an  ambitious  man  not  possessed  of 
perfect  purity  and  unbending  integrity,  it  would  be  imminently 
dangerous  to  the  public  liberty.  The  State  Banks  would  enter  the 
lists  of  political  controversy,  with  a  view  to  obtain  this  patronage ; 
and  very  little  sagacity  is  required  to  foresee,  that,  if  there  should 
ever  happen  to  be  an  administration  disposed  to  use  its  patronage 
to  perpetuate  its  power,  the  })iiblic  funds  would  be  put  in  jeopardy 
by  being  deposited  in  Banks  unworthy  of  confidence,  and  the  most 
extensive  corruption  brouglit  to  bear  upon  the  elections  throughout 
the  Union.  A  state  of  things  more  adverse  to  the  purity  of  the 
government,  a  power  more  liable  to  be  abused,  can  scarcely  be 
imagined.  If  five  millions  of  dollars  were  annually  placed  in  the 
hands  of  the  Secretary  of  the  Treasury,  to  be  distributed,  at  his 
discretion,  for  the  purposes  of  inteilial  improvement,  it  would  not 
invest  him  with  a  more  dangerous  and  corrupting  power.  .  .  . 

"  A  very  grave  and  solemn  question  will  be  ])resented  to  Con- 
gress, when  they  come  to  decide  upon  the  expediency  of  renewing 
the  charter  of  the  present  Bank.  That  institution  has  succeeded  iu 
carrying  the  country  through  the  painful  process  necessary  to  cure 
a  deep-seated  disease  in  the  national  currency.  The  nation,  after 
having  suffered  the  almost  convulsive  agonies  of  this  necessary 
remedy,  is  now  restored  to  perfect  health.  In  this  state  of  things, 
it  will  be  for  Congress  to  decide  whether  it  is  the  part  of  wisdom 
to  expose  the  country  to  a  degree  of  suffering  almost  equal  to  that 
which  it  has  already  suffered,  for  the  purpose  of  bringing  back  that 
\ery  derangement  of  the  currency  Avhich  has  been  remedied  by  a 
process  as  necessary  as  it  was  distressing. 

"  If  the  Bank  of  the  United  States  were  destroyed,  and  the  local 
institutions  left  without  its  restraining  influence,  the  currency 
would  almost  certainly  relapse  into  a  state  of  unsoundness.  The 
very  pressure  which  the  present  Bank,  in  winding  up  its  concerns, 
would  make  upon  the  local  institutions,  would  compel  them  either 
to  curtail  their  discounts,  when  most  needed,  or  to  suspend  specie 
payments.  It  is  not  difiicult  to  predict  which  of  these  alternatives 
they  would  adopt,  under  the  circumstances  in  which  they  would  be 
placed.  The  imperious  wants  of  a  suffering  community  would  call 
for  discounts,  in  language  which  could  not  be  disregarded.  The 
public  necessities  would  demand,  and  public  opinion  would  sanction, 
the  suspension,  or  at  least  an  evasion,  of  specie  payments. 

"  But,  even  if  this  desperate  resort  could  be  avoided  in  a  period 
of  peace  and  general  prosperity,  neither  reason  nor  experience  will 
permit  us  to  doubt  that  a  state  of  war  would  speedily  bring  about 
all  the  evils  which  so  fatally  affected  the  credit  of  the  government 
and  the  national  cui-rency  during  the  late  war  with  Great  Britain. 
We  should  be  ag-ain  driven  to  the  same  miserable  round  of  finan- 
cial  expedients,  which,  in  little  more  than  two  years,  brought  a 
wealthy  community  almost  to  the  very  brink  of  a  declared  national 
bankruptcy,  and  placed  the  government  completely  at  the  mercy 
of  speculating  stock-jobbers. 


502      CURRENCY   AND    BANKING    IN   THE   UNITED   STATES.' 

«  The  Committee  feel  warranted,  by  the  past  experience  of  the 
country  in  expressing  it  as  their  deliberate  opinion,  that,  m  a  period 
of  war,  the  financial  resources  of  the  country  could  not  be  drawn 
into  efficient  operation,  without  the  aid  of  a  National  Bank,  and 
that  the  local  Banks  would  certainly  resort  to  a  suspension  of 
specie  payments.  The  maxim  is  eminently  true,  in  modern  times, 
that  money  is  the  sinew  of  military  power.  In  this  view  oi  the 
subiect,  it  does  appear  to  the  Committee  that  no  one  of  the  institu- 
tions of  the  country,  not  excepting  the  Army  or  Navy,  is  of  more 
vital  importance  than  a  National  Bank.  It  has  this  decided  ad- 
vantage over  the  Army  and  Navy  :  while  they  are  of  scarcely  any 
value  except  in  war,  the  Bank  is  not  less  useful  than  either  of  them 
in  war,  and  is  also  eminently  useful  in  peace.  It  has  another 
advantage,  still  greater.  If,  like  the  Army  or  Navy,  it  should  cost 
the  nation  millions  annually  to  sustain  it,  the  expediency  of  the 
expenditure  might  be  doubted.  But  when  it  actually  saves  to  the 
government  and  to  the  country,  as  the  Committee  have  heretofore 
attempted  to  show,  more  millions  annually  than  are  expended  in 
supporting  both  the  Army  and  Navy,  it  would  seem  that,  if  there 
were  any  one  measure  of  national  policy,  upon  which  all  the 
political  parties  of  the  country  should  be  brought  to  unite,  by  the 
impressive  lessons  of  experience,  it  is  that  of  maintaining  a  National 
Bank." 

The  preceding  extracts  present,  succinctly  and  intelligibly, 
the  reasons  for  the  creation  of  both  of  the  Banks ;  the  consti- 
tutional objections  that  were  urged  ;  the  final  abandonment  of 
these  in  1816  ;  the  services  that  each  Bank  rendered  both  to 
the  government  and  the  people  ;  and  the  tremendous  disasters 
that  were  suffered  in  the  interregnmn  between  them.  In  the 
four  years,  the  government  in  its  operations  made  a  loss  of 
154,000,000,  from  the  depreciation  of  the  currency,  and  in  the 
cost  of  transfers  which  had  been  previously  made  by  the  Bank 
without  charge.  It  had  no  alternative  but  to  use  the  notes  of 
the  State  Banks,  no  matter  the  degree  of  their  depreciation. 
It  was  only  too  happy  to  obtain  them  at  any  rate  in  payment 
of  loans.  Coin  was  not  to  be  had.  In  the  dilemma  in  which 
all  —  government  and  people  —  were  alike  placed,  a  new  United 
States  Bank  seemed  the  only  escape  from  utter  ruin.  If  the 
former,  with  expenditures  equalling  only  about  $25,000, 000 
yearly,  suffered  a  loss  of  $54,000,000  from  a  depreciated  cur- 
rency, how  vast  must  have  been  that  of  the  people  whose 
transactions  were  tenfold  greater  !  Those  of  the  former  were 
restricted  in  time  to  about  three  years ;  while  nearly  fifteen 
were  required  to  restore  the  financial  condition  of  the  country 
to  that  existing  at  the  expiration  of  the  charter  of  the  first 


REVIVAL   OF   THE   OLD    PARTIES.  503 

Bank.  The  reduction  of  the  currency  from  $110,000,000, 
according  to  Mr.  Crawford,  to  $45,000,000,  in  the  short  period 
of  three  years,  is  sufficient  evidence  of  the  terrible  waste  and 
destruction  which  all  contemporaneous  writers  describe.  In 
spite  of  all  the  efforts  that  the  Bank  could  exert,  vast  numbers 
of  State  Banks  were,  for  a  long  time  after  its  organization,  con- 
stantly coming  into  and  going  out  of  existence.  It  was  not 
till  after  1826  that  the  financial  condition  of  the  country  seemed 
fully  restored. 

The  report  of  the  House  Committee  was  generally  accepted 
as  effectually  disposing  of  the  attack  by  the  President  upon 
the  Bank.  Its  friends,  however,  counted  wholly  without  their 
host.  They  knew  little  of  the  man  with  whom  they  had  to 
deal,  and  as  little  of  the  causes  already  at  work  which  were 
to  produce  an  outburst  of  fanaticism  that  was  to  sweep  with 
resistless  fury  over  the  nation.  Jefferson,  who  had  carried  the 
doctrine  of  nullification  to  the  extremest  limits  short  of  an 
overt  act,i  was  followed  by  Presidents,  who,  from  their  char- 
acters rather  than  from  purpose,  tended  to  restore  the  govern- 
ment to  the  model  of  Washington  and  Hamilton.  Madison  — 
who  earnestly  opposed,  on  constitutional  grounds,  the  charter- 
ing of  the  first  Bank  ;  and  who,  as  a  member  of  the  Legislature 
of  Virginia,  wrote  an  elaborate  report  in  vindication  of  the 
Resolutions  of  1798  —  wholly  abandoned  his  former  position,  by 
recommending,  and  affixing  his  signature  to,  the  Act  incorpo- 
rating, in  1816,  the  second  Bank.  His  reasons  were  those  which 
should  influence  and  control  the  judgment  of  every  right- 
minded  man,  —  the  uniform  precedents,  through  a  long  series 
of  years,  of  the  National  Legislature,  and  of  the  legal  tribunal 
of  last  resort.  Monroe  followed  by  the  approval  of  the  Bill 
making  provision  for  elaborate  surveys,  with  a  view  to  the 
construction  of  extended  lines  of  public  works.  Under  such 
administrations,  which  accepted  the  precedents  of  the  past 
as  their  guide,  and  which  left  the  articulations  of  the  peo- 
ple almost  wholly  free,  the  nation  entered  upon  a  period  of 
natural  and  orderly  development,  inferring  the  functions  of 
government  from  the  advantages  resulting  from  their  exercise. 
Such  is  the  inference  of  every  people  capable  of  order  and 
progress. 

1  After  his  accession  to  the  Presidency,  he  discharged  from  custody  parties 
held  under  the  Alien  and  Sedition  Laws,  on  the  ground  that  such  laws  were  void 
from  their  unconstitutionality. 


504      CURRENCY   AND   BANKING  IN  THE    UNITED    STATES. 

This  tendency,  thoroughly  pronounced,  caused  the  greatest 
consternation  on  the  part  of  Jefferson,  who  lost  not  a  moment 
in  sounding  the  alarm  that  the  country,  under  the  loose  con- 
struction of  the  Constitution  which  was  everywhere  prevailing, 
was  tending  toward  consolidation  and  monarchy,  —  all,  how- 
ever, for  a  time  to  very  little  purpose.  So  long  as  Virginians 
occupied  the  presidential  chair,  it  was  very  difficult  to  revive 
the  old,  or  divide  the  country  upon  new,  issues.  During  the 
latter  part  of  Mr.  Monroe's  administration,  political  parties 
seemed  to  have  wholly  disappeared.  He  had  returned  to  the 
sentiments  and  practice  of  one,  without  seeming  to  have 
deserted  those  of  the  other.  To  him  succeeded  the  second 
Adams,  not  by  the  choice  of  the  people,  but  by  that  of  Con- 
gress. His  election  was  the  signal  for  the  immediate  revival 
of  the  old  parties,  with  all  their  former  bitterness.  In  place  of 
Virginians,  the  laxity  of  whose  political  morals  could  be  over- 
looked out  of  respect  to  their  citizenship,  services,  and  char- 
acter, came  a  Puritan  of  the  Puritans,  —  severe  in  his  manners 
and  life,  of  all  men  the  most  obnoxious  to  the  South  ;  and 
who,  to  crown  all,  was  far  more  free  in  the  construction  of  the 
Constitution  than  Hamilton  himself.^  His  election  was  an 
insult  to  the  ideas,  institutions,  and  dignity  of  the  South.  It 
was  an  accident  resulting  from  want  of  proper  precaution  and 
organization,  and  was  hy  no  means  to  be  allowed  to  happen  a 
second  time. 

The  unanimity  and  earnestness  with  which  Mr.  Adams  was 
opposed  at  the  South,  and  the  ease  with  wliich,  by  the  help  of 
Northern  allies,  he  was  defeated  when  he  ran  for  a  second 

1  "  The  question  of  the  power  of  Congress  to  authorize  the  making  of  internal 
improvements  is,  in  other  words,  a  question  wliether  the  people  of  this  Union, 
in  forming  their  common  social  compact,  as  avowedly  for  the  purpose  of  pro- 
moting their  general  welfare,  have  performed  their  work  in  a  manner  so  inef- 
fably stupid  as  to  deny  themselves  the  means  of  bettering  their  own  condition. 
I  have  too  much  respect  for  the  intellect  of  my  country  to  believe  it.  The  first 
object  of  human  association  is  the  improvement  of  the  condition  of  the  associated. 
Roads  and  canals  are  among  the  essential  means  of  improving  the  condition  of 
nations ;  and  a  people  wliich  should  deliberately,  by  the  organization  of  its  author- 
ized power,  deprive  itself  of  the  faculty  of  multiplying  its  own  blessings,  would 
be  as  wise  as  a  creator  who  should  undertake  to  constitute  a  human  being  with- 
out a  head."— Letter  of  Jolin  Quincy  Adams,  Niles'  Register,  vol.  xxvi.  p.  251. 

Nothing  could  excite  greater  alarm  and  opposition  at  the  South  than  such 
sentiments  as  these.  Their  adoption  would  be  nothing  less  than  a  government  of 
the  majority,  which  might  know  no  other  law  than  the  promotion  of  its  real  or 
fancied  welfare. 


EEVIVAL  OF  THE   OLD   PARTIES.  505 

term,  tauglit  a  lesson  wliicli  was  only  too  well  heeded  ;  wliich. 
was,  to  form  a  party  based  upon  Southern  ideas,  which  could 
undergo  no  change  so  long  as  their  chief  institution  remained. 
Never,  apparently,  was  there  a  firmer  foundation  upon  which  to 
build,  and  never  a  combination  which  promised  to  }ield  to 
both  parties  more  satisfactory  results.     The  South  was  con- 
tent, as  a  means  of  preserving  slavery,  with  the  construction 
of  the  Constitution,   and  with  the  privilege   of  defining  the 
nature  of  the  general  government.     All  this  their  Northern 
allies  freely  conceded,  for  the  possession  of  the  public  patron- 
age.    "  The  South  was  to  be  secured  by  going  with  the  South, 
and  the  North  by  party  machinery,"  was  a  maxim  in  politics 
which  grew  out  of  this  combination  for  a  partition  of  the  gov- 
ernment and  its  patronage.     At  the  time  of  which  we  are 
speaking,  "  strict  construction  "  was  felt  to  be  of  far  more  im- 
portance to  the  South  than  in  1791.     Time  had  only  served 
to  increase  the  differences  between  the  two  great  sections  of 
the  country,  —  two  nations  from  the  beginning.     During  the 
early    part    of    Mr.    Adams'    administration    took    place   the 
famous  experiment  on  the  Stockton  and  Darlington  Railway, 
in  England,  —  the  most  important  event  in  modern  times,  as  it 
demonstrated  the  practicability  of  the  use  of  steam  as  a  loco- 
motive power.     The  preceding  half  century  had  been  greatly 
distinguished  by  the  prodigious  progress  made  in  the  useful 
arts.     The  North  caught,  in  full  measure,  the  spirit   abroad 
in  other  lands,   and  welcomed  the  new  helps  which  the  in- 
ventive genius  of  the  race  had  brought  to   its   aid,  many  of 
which  possessed  a  peculiar  value  in  a  country  like  their  own. 
One  great  want  was  public  highways,  to  give  a  value  to  the 
products  of  the  soil.     To  encourage  manufactures,  protective 
tariffs  were  enacted.     In  all  such  measures  to  be  undertaken 
by  the   general    government,  the    South,    which   blindfolded 
labor  in  order  to  keep  it  in  ignorance  and  contented  with  its 
lot,  saw  no  advantage  but  to  their  rivals  ;  who  were  to  increase 
in  numbers  and  strength  at  their  cost,  from  the  use  of  con- 
trivances and  methods  for  which  they  were  to  be  taxed,  but  in 
the  benefits  resulting  from  which  they  could  have  little  share. 
Hence  the  redoubled  earnestness  with  which  they  pressed  the 
doctrine  of  "  strict  construction,"  and  the  unconstitutionality  of 
the  Bank.     The  Northern  wing  of  the  party  readily  }delded 
to  all  demands  in  this  direction,  not  only  as  the  price  of  the 


506      CURRENCY   AND   BANKING  IN  THE  UNITED  STATES. 

emoluments  conceded  to  it,  but  from  sheer  incredulity  as  to 
the  consequences.  What  were  stern  realities  with  one,  were 
mere  metaphysical  abstractions  with  the  other.  What  harm 
could  come,  reasoned  the  Northern  wing,  of  the  most  extrava- 
gant popular  harangues,  or  the  extremest  language  in  pohtical 
addresses  and  resolutions  ?  Every  thing  went  on  just  as  well 
after  as  before.  The  government  continued  in  the  orderly 
discharge  of  its  wonted  functions,  although  every  attribute  of 
power  conflicting  with  the  sovereignty  of  the  States  was 
denied  it.  The  consequences  were  all  the  more  fatal,  the  less 
they  were  perceived.  Constant  iteration  begat  in  time  a  con- 
viction, in  both  wings  of  the  party,  that  the  government  was 
one  without  powers,  unless  it  were  those  necessary  to  uphold 
and  extend  slavery ;  so  that  when  the  inevitable  crisis  came, 
those  administering  it  deniet^  to  it  the  power  of  attempting  to 
put  down  an  armed  insurrection  aimed  at  its  very  life.  The 
great  majority  at  the  North  well  knew  that  it  had  ceased  to 
represent  them  and  the  better  and  higher  sentiments  of  the 
nation  ;  but  how  to  attack  and  overthrow  a  party  so  intrenched 
in  office,  and  so  sustained  by  the  precedents  of  the  past,  was  for 
a  long  time  a  problem  that  seemed  to  defy  solution.  Foreign- 
ers, who  could  not  see  beneath  the  surface,  inferred,  and  very 
properly,  the  manners  of  the  nation  from  the  brutalities  prac- 
tised at  the  national  capital  and  in  the  halls  of  Congress  ;  and 
its  morals,  from  the  chicanery  and  intrigue  which,  from  the 
example  set  in  the  national  politics,  invaded  and  polluted  the 
public  service,  not  only  of  the  Nation  and  States,  but  often 
of  the  most  insignificant  municipality.  Along  with  all  this 
demoralization  went  a  mighty  moral  and  material  development ; 
so  that  when  the  North  seized  the  reins  of  the  government, 
and  when  nothing  was  expected  of  it  but  incoherency  and  im- 
becility, the  world  was  electrified  by  a  display  of  intelligence 
and  power  which  not  only  triumphed  over  the  most  formidable 
obstacles,  but  for  the  first  time  in  its  history  placed  the  insti- 
tutions of  the  country  upon  the  basis  not  of  force,  but  of 
right,  —  scattering  to  the  winds  Jefferson's  and  Jackson's  con- 
struction of  the  Constitution,  by  the  overthrow  of  the  very 
institution  whose  necessities  gave  it  birth. 

In  vain  did  Congress,  with  all  the  most  sagacious  and  pat- 
riotic of  all  parties,  earnestly  protest  against  the  position  taken 


Am 


THE   CONSTITUTIONALITY    OF   THE    BANK.  507 

by  the  President,  which  appeared  so  wanton  and  ill-advised. 
Two  men  were  then  living,  who  of  all  others,  Avere  best  fitted 
to  counsel  and  guide  the  nation.  These  were  Mr.  Madison 
and  Mr.  Gallatin,  —  alike  venerable  for  their  age,  but  far  more 
so  for  the  eminent  services  that  each  had  rendered  to  the 
nation.  Next  to  Washington  and  Hamilton,  no  one  contributed 
so  much  as  Madison  toward  the  formation  of  its  government. 
Secretary  of  State  for  the  whole  period  of  Jefferson's  adminis- 
tration, he  was  President  for  the  eight  succeeding  years,  dis- 
charging all  the  duties  of  his  exalted  station  with  singular 
disinterestedness  and  success.  He  earnestly  opposed  the  first 
Bank,  upon  constitutional  grounds.  Its  charter  expired  under 
his  administration.  He  was  witness  of  the  terrible  disasters 
which  followed  the  refusal  to  extend  it.  As  the  only  means 
of  escaping  from  them,  he  recommended  the  creation  of  a  new 
Bank,  waiving  his  constitutional  scruples  as  having  been  over- 
ruled by  competent  precedents  of  the  past.  Tlie  reasons  for 
the  change  in  his  opinions  were  fully  set  out  in  a  letter,  de- 
signed for  publication,  in  reply  to  General  Jackson's  attack, 
in  which  he  said  :  — 

"  The  charge  of  inconsistency  between  my  objection  to  the  con- 
stitutionaHty  of  siich  a  Bank  in  1791  and  my  assent  in  1817  turns 
on  the  question,  how  far  legislative  precedents,  expounding  the 
Constitution,  ought  to  guide  succeeding  legislatures,  and  to  overrule 
individual  opinions. 

"  Some  obscurity  has  been  thrown  over  the  question,  by  con- 
founding it  with  the  respect  due  from  one  legislature  to  laws 
passed  by  preceding  legislatures.  But  the  two  cases  arc  essen- 
tially different.  A  constitution,  being  derived  from  a  superior 
authority,  is  to  be  expounded  and  obeyed,  not  controlled  or  vai-ied, 
by  the  subordinate  authority  of  a  legislature.  A  law,  on  the  other 
hand,  resting  on  no  higher  authority  than  that  possessed  by  every 
successive  legislature,  its  expediency  as  well  as  its  meaning  is 
within  the  scope  of  the  latter. 

"  The  case  in  question  has  its  true  analogy  in  the  obligations 
arising  from  judicial  expositions  of  the  law  on  succeeding  judges  ; 
the  constitution  being  a  law  to  the  legislator,  as  the  law  is  a  rule 
of  decision  to  the  judge. 

"  And  why  are  judicial  precedents,  when  formed  on  due  dis- 
cussion and  deliberately  sanctioned  by  reviews  and  repetitions, 
regarded  as  of  binding  influence,  or  rather  of  authoritative  force, 
in  settling  the  meaning  of  a  law?  It  must  be  answered,  1st,  Be- 
cause it  is  a  reasonable  and  established  axiom,  that  the  good  of 
society  requires  that  the  rules  of  conduct  of  its  members  should 
be  certain  and  known,  which  would  not  be  the  case  if  any  judge, 


508      CURRENCY   AND   BANKING   IN   THE   UNITED   STATES. 

disregarding  the  decisions  of  his  predecessors  should  vary  the  rule 
of  law  according  to  his  individual  interpretation  of  it :  "  Misera  est 
servitus  ubi  jus  est  aut  vagum  aut  incognitum."  2d,  Because  an 
exposition  of  the  law,  publicly  made,  and  repeatedly  confirmed  by 
the  constituted  authority,  carries  with  it,  by  fair  inference,  the 
sanction  of  those  who,  having  made  the  law  through  their  legis- 
lative organ,  appear  under  such  circumstances  to  have  determined 
its  meaning  through  their  judiciary  organ.    . 

"  Can  it  be  of  less  consequence  that  the  meaning  of  a  constitu- 
tion should  be  fixed  and  known  than  that  the  meaning  of  a  law 
should  be  so?  Can,  indeed,  a  law  be  fixed  in  its  meaning  and 
operation,  unless  the  constitution  be  so?  On  the  contrary,  if  a 
particular  legislature,  differing  in  the  construction  of  the  consti- 
tution from  a  series  of  preceding  constructions,  proceed  to  act  on 
that  difference,  they  not  only  introduce  uncertainty  and  instability 
in  the  constitution,  but  in  the  laws  themselves;  inasmuch  as  all 
laws  preceding  the  new  construction,  and  inconsistent  with  it,  are 
not  only  annutled  for  the  future,  but  virtually  pronounced  nullities 
from  the  beginning. 

"  But  it  is  said  that  the  legislator,  having  sworn  to  support  the 
constitution,  must  support  it  in  his  own  construction  of  it,  how- 
ever different  from  that  put  on  it  by  his  predecessors,  or  whatever 
be  the  consequences  of  the  construction.  And  is  not  the  judge 
under  the  same  oath  to  support  the  law  ?  Yet,  has  it  ever  been 
supposed  that  he  was  required  or  at  liberty  to  disregard  all  pre- 
cedents, however  solemnly  repeated  and  regularly  observed  ;  and, 
by  giving  effect  to  his  own  abstract  and  individual  opinions,  to 
disturb  the  established  course  of  i)ractice  in  the  business  of  the  com- 
munity ?  Has  the  wisest  and  most  conscientious  judge  ever  scrupled 
to  acquiesce  in  decisions  in  which  he  h.is  been  overruled  by  the 
matured  opinions  of  the  majority  of  his  colleagues  ;  and  subsequently 
to  conform  himself  thereto,  as  to  authoritative  expositions  of  the 
law  ?  And  is  it  not  reasonable  to  su])pose  that  the  same  view  of  the 
ofiicial  oath  should  be  taken  by  a  legislature  acting  under  the  con- 
stitution, which  is  his  guide,  as  is  taken  by  a  judge  acting  under 
the  law,  which  is  his  ? 

"  There  is,  in  fact,  and  in  common  understanding,  a  necessity  of 
regarding  a  course  of  practice,  as  above  cliaracterized,  in  the  light 
of  a  legal  rule  of  interpreting  a  law  ;  and  there  is  a  like  necessity 
of  considering  it  a  constitutional  rule  of  interi)reting  a  constitution. 

"  That  there  may  be  extraordinary  and  peculiar  circumstances 
controlling  the  rule  in  both  cases,  may  be  admitted  ;  but,  with  such 
exceptions,  the  rule  will  force  itself  on  the  practical  judgment  of 
the  most  ardent  theorist.  He  will  find  it  impossible  to  adhere  to, 
and  act  ofticially  upon,  his  solitary  opinions  as  to  the  meaning  of 
the  law  or  constitution,  in  opposition  to  a  construction  reduced  to 
practice  during  a  reasonable  period  of  time  ;  more  especially  where 
no  prospect  existed  of  a  change  of  construction  by  the  public  or  its 
agents.  And  if  a  reasonable  period  of  time,  marked  with  the 
usual  sanctions,  would  not  bar  the  individual  prerogative,  there 
could  be  no  limitation  to  its  exercise,  although  the  danger  of  error 


Jackson's  construction  of  the  constitution.     509 

must  increase  with  the  increasing  obUvion  of  explanatory  circum- 
stances, and  with  the  continual  changes  in  the  import  of  words 
and  phrases. 

"Let  it,  then,  be  left  to  the  decision  of  every  intelligent  and 
candid  judge,  which,  on  the  whole,  is  most  to  be  relied  on  for  the 
true  and  safe  construction  of  a  constitution  :  that  which  has  the  uni- 
form sanction  of  successive  legislative  bodies,  through  a  period  of 
years,  and  under  the  varied  ascendency  of  parties ;  or  that  which 
depends  on  the  opinions  of  every  new  legislature,  heated  as  it 
may  be  by  the  spirit  of  party,  eager  in  the  pursuit  of  some  favorite 
object,  or  led  astray  by  the  eloquence  and  address  of  popular  states- 
men, themselves  perhaps  under  the  influence  of  the  same  misleading 
causes."  ^ 

To  these  words  of  moderation  and  wisdom,  to  a  construc- 
tion necessary  to  the  maintenance  of  government  even  under 
a  despotism,  —  for,  unless  the  past  be  in  great  measure  the 
guide  for  the  immediate  future,  chaos  usurps  the  place  of 
order  and  law,  —  General  Jackson  replied,  in  his  veto  of  the 
bill  extending  the  charter  of  the  Bank  that :  — 

"  The  Supreme  Court  ought  not  to  control  the  co-ordinate  authori- 
ties of  this  government.  The  Congress,  the  executive,  and  the 
court  must  each  for  itself  be  guided  by  its  own  opinion  of  the 
Constitution.  Each  public  officer  who  takes  an  oath  to  support 
the  Constitution  swears  that  he  will  support  it  as  he  understands 
it,  and  not  as  it  is  understood  by  others.  It  is  as  much  the  duty 
of  the  House  of  Representatives,  of  the  Senate,  and  of  the  Presi- 
dent, to  decide  upon  the  constitutionality  of  any  bill  or  resolution 
which  may  be  presented  to  them  for  passage  or  approval,  as  it  is 
of  the  supreme  judges,  when  it  may  be  brought  before  them  for 
judicial  decision.  The  opinion  of  the  judges  has  no  more  authority 
over  Congress  than  the  opinion  of  Congress  has  over  the  judges ; 
and  on  that  point  the  President  is  independent  of  both.  The 
authority  of  the  Supreme  Court  must  not,  therefore,  be  permitted 
to  control  the  Congi-ess  or  the  Executive,  Avhen  acting  in  their 
respective  capacities ;  but  to  have  only  such  influence  as  the  force 
of  their  reasoning  may  deserve." 

In  the  preceding  extract,  every  one  now  sees  the  beginning 
of  the  end:  Jackson  completed  the  work  of  Jefferson.  The 
latter  denied  to  our  government  the  powers  necessary  to  its 
very  existence ;  the  former,  by  making  the  will  or  caprice  of 
the  individual  the  rule  of  his  conduct,  inaugurated  the  reign 
of  anarchy  and  barbarism.^ 

1  History  of  the  Bank,  p.  778. 

2  Jackson  has  usually  been  regarded  as  deserving  great  praise  for  upholding 
the  Constitution  at  the  first  attempt  of  South  Carolina  to  put  into  practice  Jeffer- 


510      CUEKENCY   AND   BANKING  IN   THE   UNITED   STATES. 

Next  to  Mr.  Madison,  the  person  best  entitled  to  be  heard 
and  to  counsel  the  nation  in  such  a  crisis  was  Mr.  Gallatin. 

son's  theory  of  the  nature  of  our  government.  Never  was  praise  more  unde- 
served. There  was  hardly  a  shade  of  diflerence  in  the  political  principles  of  the 
two.  South  Carolina  was  personated  in  Calhoun,  —  a  man  of  boundless  ambition, 
whose  place  Jackson  had  secured.  Defeated,  Calhoun,  partly  in  revenge,  brought 
forward  his  nullification  doctrines,  —  the  pretext  being  the  tariff.  Jackson, 
enraged  against  his  rival  for  seeking  his  place,  attacked  him  with  the  utmost 
fury,  and  always  regretted  that  he  had  not  hanged  him,  as  a  proper  and  summary 
mode  of  dealing  with  such  an  antagonist.  In  reply  to  the  Ordinance  of  Secession, 
Jackson  did  utter  some  fine  tilings  about  the  Constitution,  and  the  obligations  it 
imposed, — far  too  fine  for  his  Southern  friends,  who  in  turn  assailed  him  with  as 
much  fury  as  he  had  assailed  Calhoun.  Finding  that  he  had  gone  too  far,  that 
he  had  been  wholly  misunderstood,  he  authorized  a  full  recantation  of  the  doc- 
trines contained  in  the  proclamation,  planting  himself  squarely  on  the  resolutions 
of  1798,  the  very  grounds  upon  which  South  Carolina  threatened  to  secede  :  — 

"  The  proclamation,  then,  in  the  passages  objected  to,  has  merely  spoken 
the  facts  of  history,  —  the  language  of  the  Constitittion,  and  of  the  Declaration  of 
Independence.  There  is  no  speculative  opinion  advanced,  no  theory  proposed. 
And  we  have  endeavored  to  show  that  nothing  in  these  generalities  tended  in  the 
slightest  degree  to  justify  the  inferences  drawn  from  them,  and  which  have  been 
substituted  as  the  principles  of  the  proclamation.  But  we  are  authorized  to  be 
more  explicit,  and  to  say  positively  that  no  part  of  the  proclamation  was  meant 
to  countenance  the  consolidating  principles  which  have  been  asoribed  to  it.  On 
the  contrary,  its  doctrines,  if  construed  in  the  sense  they  were  intended,  and 
carried  out,  inculcate  that  the  Constitution  of  tlie  United  States  is  founded  in 
compact,  —  that  this  compact  derives  its  obligation  from  the  agreement  entered 
into  by  the  people  of  each  of  the  States,  in  their  political  capacity,  with  the  people 
of  the  other  States;  that  the  Constitution,  which  is  the  offspring  of  this  compact, 
has  its  sanction  in  the  ratification  of  the  people  of  the  several  States,  acting  in  the 
capacity  of  separate  communities  ;  that  the  majority  of  the  people  of  the  United 
States,  in  the  aggregate,  have  no  power  to  alter  the  Constitution  of  the  general 
government,  but  that  change  or  amendment  can  only  be  proposed  in  the  mode 
pointed  out  in  the  Constitution,  and  can  never  become  obligatory  unless  ratified 
by  the  people  of  three-fourths  of  the  States,  through  their  respective  legislat- 
ures or  State  conventions  ;  that,  inasmuch  as  the  sovereign  power  of  tlie  people 
in  each  State  has  imparted  to  the  Constitution  of  the  United  States,  and  the  laws 
made  in  pursuance  thereof,  paramount  obUgation  over  State  legislation,  or  any  con- 
stitution or  form  of  State  government  which  may  be  instituted  by  the  people  of 
such  State ;  and  inasmuch  as  the  people  of  each  State  have  bound  themselves, 
by  compact  with  the  rest,  to  abide  by  one  paramount  authority  until  changed 
according  to  the  provisions  of  the  Constitution,  so  declared  to  be  paramount,  —no 
constitution,  law,  or  ordinance  of  any  one  State  is  valid  to  defeat  the  Constitution 
and  laws  of  the  States,  or  to  sever  the  mutual  obligations  which  bind  the  States 
together  ;  —  that,  in  the  case  of  a  violation  of  the  Constitution  of  the  United  States,  and 
the  usurpation  of  poivers  not  granted  by  it  on  the  part  of  the  functionaries  of  the  general 
government,  the  State  governments  have  the  right  to  interpose  to  arrest  the  evil,  UPOK 

THE  PRINCIPLES  WHICH  ARE  SET  FORTH  IN  THE  VIRGINIA  RESOLUTIONS  OF  1798, 

AGAINST  THE  Alien  AND  SEDITION  Laws."  —  Washington  Globe,  Sept.  21,  1833. 

There  is  not  a  word  in  all  tliis  to  which  Calhoun  would  not  have  fully  sub- 
scribed.    So  long  as  a  State  remained  in  the  Union,  and  did  not  question  the 


Gallatin's  argument  in  favor  of  the  bank.     511 

A  Senator  from  Pennsylvania,  he  was  appointed  Secretary  of 
the  Treasury  by  Mr.  Jefferson,  soon  after  his  inauguration, 
—  a  position  which  he  held  till  April,  1813  ;  serving  through 
the  whole  period  of  Jefferson's  Presidency,  and  through  four 
years  of  that  of  Mr.  Madison.  No  other  man  ever  held  a  place 
in  the  cabinet  for  so  long  a  time.  Certainly,  no  man,  with  one 
single  exception,  discharged  the  duties  of  his  office  with  equal 
ability.  He  was  one  of  those  rare  men  as  capable  in  affairs  as 
in  political  life.  No  one  ever  had  so  favorable  an  opportunity 
of  estimating  tlie  services  rendered  by  the  Bank  to  the  nation, 
and  the  importance,  at  all  times,  of  such  an  institution.  In 
his  "  Considerations  on  Currency,"  —  a  work  of  remarkable 
insight  into  the  laws  of  money,  and  expressed  in  a  style  of 
conciseness  and  elegance  rare  among  writers  on  the  subject,  — 
he  bears  the  following  testimony  to  the  constitutionality  of 
both  Banks,  and  to  the  services  rendered  by  them :  — 

"  It  is  our  deliberate  opinion  that  the  suspension  might  have  been 
prevented  at  the  time  when  it  took  place,  had  the  former  Bank  of 
the  United  States  been  still  in  existence.  The  exaggerated  increase 
of  State  Banks,  occasioned  by  the  dissolution  of  that  institution, 
would  not  have  occurred.  That  Bank  would,  as  before,  have  re- 
strained within  proper  bounds,  and  checked  their  issues ;  and,tlirough 
the  means  of  its  offices,  it  would  have  been  in  possession  of  the 
earliest  symptoms  of  the  approaching  danger.  .  .  . 

"  It  will  be  found,  by  reference  to  the  report  of  the  Secretary  of 
the  Treasury  of  Decen-iber,  1815,  that  his  recommendation  to  estab- 
lish a  National  Bank  was,  in  express  terms,  called  '  a  proposition 
relating  to  the  national  circulating  medium,'  and  was  exchisively 
founded  on  the  necessity  of  restoring  specie  payments  and  the  na- 
tional currency.  He  states  it  as  a  fact,  incontestably  proved,  that 
the  State  Banks  could  not  at  that  time  be  successfully  employed  to 
furnish  an  uniform  national  currency.  He  mentions  the  faihire  of 
one  attempt  to  associate  them  with  that  view  ;  that  another  attempt, 

constitutionality  of  any  act  complained  of,  it  must  submit.  So,  if  it  sought  to 
change  the  Constitution,  it  must  proceed  according  to  tlie  appointed  methods.  It 
had,  however,  according  to  General  Jackson,  always  reserved  to  itself  tlie  riglit  to 
peaceably  withdraw  from  the  Union,  when  it  sliould  judge  a  further  continuance 
in  it  to  be  opposed  to  its  interests,  its  ideas,  or  its  rights,  "according  to  tlie  prin- 
ciples laid  down  in  the  Resolutions  of  1798  ;  "  which  provided  tliat  each  State 
was  a  judge  as  well  of  the  infraction  (of  the  Constitution),  as  of  the  mode  and 
measure  of  redress  ;  and  that  a  nullification,  by  such  sovereignty,  of  all  unauthor- 
ized acts  done  under  the  color  of  that  instrument,  is  the  rightful  remedy.  The 
whole  contest  between  Jackson  and  Calhoun  grew  out  of  political  rivalries,  and, 
so  far  as  the  former  was  concerned,  never  rose  above  the  dignity  of  a  squabble 
for  spoils. 


512  .  CTTERENCY  AND   BANKING  IN  THE   UNITED   STATES. 

by  their  ntjency  in  circulating  treasury  notes,  to  overcome  the  in- 
equalities of  the  exchange,  has  only  been  partially  successful ;  that  a 
plan  recently  proposed,  with  the  design  to  curtail  the  issues  of  bank- 
notes, to  fix  the  public  confidence  in  the  administration  of  the  affairs 
of  the  Banks,  and  to  give  to  each  Bank  a  legitimate  share  in  the 
circulation,  is  not  hkely  to  receive  the  general  sanction  of  the 
Banks;  and  that  a  recurrence  to  the  national  authority  is  indispen- 
sable for  the  restoration  of  a  national  currency.  Such  was  the 
contemporaneous  and  deliberate  opinion  of  the  officers  of  the  gov- 
ernment, who  had  to  struggle  against  the  difficulties  of  a  paper 
currency,  not  only  depreciated,  but  varying  in  value  from  day  to 
day  ancl  from  place  to  place. 

"  It  was  not  till  after  the  organization  of  the  Bank  of  the  United 
States,  in  the  latter  part  of  January,  1817,  that  delegates  from  the 
Banks  of  New  York,  Philadelphia,  Baltimore,  and  Virginia  assem- 
bled in  Philadelphia  for  the  purpose  of  agreeing  to  a  general  and 
simultaneous  resumption  of  specie  payments.  A  compact  proposed 
by  the  Bank  of  the  United  States,  acceded  to  by  the  State  Banks, 
and  ratified  by  the  Secretary  of  the  Treasury,  was  the  result  of  that 
convention.  The  State  Banks  engaged  to  commence  and  continue 
specie  payments,  on  various  conditions  relative  to  the  transfer  and 
payment  of  the  public  balances  on  their  books,  to  the  Bank  of  the 
United  States,  and  to  the  sum  M'hich  it  engaged  previously  to  dis- 
count for  individuals,  or,  under  certain  contingencies,  f<n-  the  said 
Banks ;  and  also  with  the  express  stipulation,  that  the  Bank  of  the 
United  States,  upon  any  emergency  which  might  menace  the  credit  of 
any  of  the  said  Banks,would  contribute  its  resources  to  any  reasonable 
extent  in  support  thereof,  confiding  in  the  justice  and  discretion  of 
the  Banks  respectively  to  circumscribe  their  affairs  within  the  just 
limits  indicated  by  their  respective  capitals,  as  soon  as  the  interest 
and  convenience  of  the  community  would  admit.  To  that  compact, 
which  was  carried  into  complete  effect,  and  to  the  importation  of 
more  than  $7,000,000  in  specie  fx-om  abroad  by  the  Bank  of  the 
United  States,  the  community  is  indebted  for  the  universal  restora- 
tion of  specie  payments,  and  for  their  having  been  sustained  during 
the  period  of  great  difficulty,  and  of  unexampled  exportation  of 
specie  to  China,  which  immediately  ensued.  .  .  . 

"  Both  those  advantages  were  anticipated  in  the  establishment  of 
the  Bank  of  the  United  States ;  and  it  appears  to  us  that  the  Bank 
fulfils  both  these  conditions.  As  respects  the  past,  it  is  a  matter  of 
fact  that  specie  payments  were  restored,  and  have  been  maintained 
through  the  instrumentality  of  that  institution.  It  gives  a  complete 
guarantee  that,  under  any  circumstances,  its  notes  will  preserve  the 
same  uniformity  which  they  now  possess.  Placed  under  the  control 
of  the  General  Government ;  relying  for  its  existence  on  the  correct- 
ness, prudence,  and  skill  with  which  it  shall  be  admijiistered  ;  per- 
petually watched  and  occasionally  checked  by  both  the  Treasury 
Department  and  rival  institutions;  and  without  a  monopoly,  yet 
with  a  capital  and  resources  adequate  to  the  object  for  which  it  was 
established,  —  the  Bank  also  aflbrds  the  strongest  security  which  can 
be  given  with  respect  to  paper,  not  only  for  its  ultimate  solvency, 


GENERAL  JACKSON's  NEW  ARGUMENT.  513 

but  also  for  the  uninterrupted  soundness  of  its  currency.  The  state- 
ments we  have  given  of  its  progressive  and  present  situation  show 
how  far  these  expectations  have  hitherto  been  realized. 

"  Those  statements  also  show  that  the  Bank  of  the  United  States, 
wherever  its  operations  have  been  extended,  has  effectually  checked 
excessive  issues  on  the  part  of  the  State  Banks,  if  not  in  every  in- 
stance, certainly  in  the  aggregate.  They  had  been  reduced,  before 
the  year  1820,  from  $66,000,000  to  less  than  $40,000,000.  At  that 
time,  those  of  the  Bank  of  the  United  States  fell  short  of  $4,000,000. 
The  increased  amount  required  by  the  increase  of  population  and 
wealth  during  the  ten  ensuing  years  has  been  supplied  in  a  much 
greater  proportion  by  that  Bank  than  by  those  of  the  States.  With 
a  treble  capital,  they  have  added  little  more  than  $8,000,000  to  their 
issues.  Those  of  the  Bank  of  the  United  States  were  nominally 
$12,000,000  —  in  reality  about  $11,000,000  —greater  in  November, 
1829,  than  in  November,  1819.  The  whole  amount  of  the  paper 
currency  has,  during  those  ten  years,  increased  about  45,  and  that 
portion  which  is  issued  by  the  State  Banks,  only  22^  per  cent.  We 
have  indeed  a  proof,  not  very  acceptable  perhaps  to  the  Bank,  but 
conclusive  of  the  fact  that  it  has  performed  the  office  required  of  it  in 
that  respect.  The  general  complaints,  on  the  part  of  many  of  the 
State  Banks,  that  they  are  checked  and  controlled  in  their  opera- 
tions by  the  Bank  of  the  United  States,  —  that,  to  use  a  common 
expression,  'it  opei-ates  as  a  screw,'  —  is  the  best  evidence  that  its 
general  operation  is  such  as  had  been  intended.  It  was  for  that 
very  purpose  that  the  Bank  was  established.  We  are  not,  however, 
aware  that  a  single  solvent  Bank  has  been  injured  by  that  of  the 
United  States,  though  many  have  undoubtedly  been  restrained  in 
the  extent  of  their  operations  much  more  than  was  desirable  to 
them.  This  is  certainly  inconvenient  to  some  of  the  Banks,  but 
in  its  genei-al  effects  is  a  public  benefit  to  the  community.  .  .  . 

"  The  manner  in  which  the  Bank  checks  the  issue  of  the  State 
Banks  is  equally  simple  and  obvious.  It  consists  in  receiving  the 
notes  of  all  those  which  are  solvent,  and  requiring  payment  from 
time  to  time,  without  suffering  the  balance  due.  by  any  to  become 
too  large.  Those  notes  on  hand,  taking  the  average  of  the  three 
and  a  half  last  years,  amount  always  to  about  $1,500,000  ;  and  the 
balances  due  by  the  Banks  in  account  current  (deducting  balances 
due  to  some),  to  about  $900,000.  We  think  we  may  say  that,  on 
this  operation,  which  requires  particular  attention  and  vigilance, 
and  must  be  carried  on  with  great  firmness  and  due  forbearance, 
depends  almost  exclusively  the  stability  of  the  currency  of  the 
country."  ^ 

To  overcome  the  force  of  the  arguments  of  Mr.  Madison  and 
Mr.  Gallatin,  which  carried  with  them  the  intelligence  and  the 
better  sense  of  the  nation,  Jackson  was  driven  to  a  new  issue. 
In  the  first,  the  Bank  was  unconstitutional,  and  did  not  accom- 

1  Considerations  on  the  Currency  and  Banking  System  of  the  United  States. 

33 


514      CUEKENCY   AND   BANKING   IN   THE   UNITED   STATES. 

plish  its  objects,  —  the  creation  of  a  currency  uniform  in  value. 
It  was  now  an  institution  wholly  incompatible  with  our  form 
of  government,  the  liberties  and  the  moral  and  material  welfare 
of  ttie  people  ;  and  he  appealed  to  them,  at  the  price  of  every 
thing  they  held  dear,  to  come  to  his  aid  in  putting  down 
"  the  monster,"  as  he  was  accustomed  to  term  the  Bank.  His 
indictment  against  it  is  fully  set  forth  in  his  final  legacy,  —  his 
farewell  address,  —  which,  in  imitation  of  Washington,  he 
delivered  to  the  country  at  the  close  of  his  official  life,  a 
year  after  the  charter  of  the  Bank  expired,  and  passion  had 
time  to  cool.     In  this  he  said, — 

"  Kecent  events  have  proved  that  the  paper-money  system  of  this 
country  may  be  used  as  an  engine  to  undermine  your  free  institu- 
tions ;  and  those  who  desire  to  engross  all  power  in  the  hands  of 
the  few,  and  to  govern  by  corruption  or  force,  are  aware  of  its 
power,  and  prepared  to  emph>y  it.  Your  Banks  now  furnish  your 
only  circulating  medium,  and  money  is  plenty  or  scarce  according 
to  the  quantity  of  notes  issued  by  them.  While  they  have  capitals 
not  greatly  disproportioned  to  each  other,  they  are  competitors  in 
business,  and  no  one  of  them  can  exercise  dominion  over  the  rest : 
and  although,  in  the  present  state  of  the  currency,  these  Banks 
may  and  do  operate  injuriously  upon  the  habits  of  business,  the 
pecuniary  concerns,  and  the  moral  tone  of  society,  yet,  from  their 
number  and  dispersed  situation,  they  cannot  combine  for  the  pur- 
poses of  political  influence  ;  and,  whatever  may  be  the  disposition  of 
some  of  them,  their  power  of  mischief  must  necessarily  be  confined 
to  a  narrow  space,  and  felt  only  in  their  immediate  neighborhoods. 

"  But  when  the  charter  for  the  Bank  of  the  United  States  was 
obtained  from  Congress,  it  perfected  the  schemes  of  the  ]iaper  sys- 
tem, and  gave  to  its  advocates  the  position  they  have  struggled 
to  obtain,  from  the  commencement  of  the  Federal  Government  to 
the  present  hour.  The  immense  capital  and  peculiar  privileges 
bestowed  upon  it  enabled  it  to  exercise  despotic  sway  over  the  other 
Banks  in  every  part  of  the  country.  From  its  superior  strength,  it 
could  seriously  injure,  if  not  destroy,  the  business  of  any  one  of 
them  which  might  incur  its  resentment;  and  it  openly  claimed  for 
itself  the  power  of  regulating  the  currency  throughout  the  United 
States.  .  .  . 

"  The  result  of  the  ill-advised  legislation  which  established  this 
great  monopoly  was  to  concentrate  the  whole  moneyed  power  of 
the  Union,  with  its  boundless  means  of  corruption  and  its  numerous 
dependents,  under  the  direction  and  command  of  one  acknowledged 
head  :'  thus  organizing  this  particular  interest  as  one  body,  and 
securing  to  it  unity  and  concert  of  action  throughout  the  United 
States ;  and  enabling  it  to  bring  forward,  upon  any  occasion,  its  entire 
and  undivided  strength  to  support  or  defeat  any  measure  of  the  gov- 
ernment.    In  the  hands  of  this  formidable  power,  thus  perfectly 


ALLEGED   CONSPIRACY   OF   CAPITAL  AGAINST   LABOB.     515 

organized,  was  also  placed  unlimited  dominion  oA^er  the  amount  of 
the  circulating  medium ;  giving  it  the  power  to  regulate  the  value 
of  property  and  the  fruits  of  labor  in  every  city  of  the  Union, 
and  to  bestow  property  or  bring  ruin  ujion  any  city  or  section  of 
the  country,  as  might  best  comport  with  its  own  interest  or 
policy. 

"  We  are  not  left  to  conjecture  how  the  moneyed  power,  thus 
organized,  and  with  such  a  weapon  in  its  hands,  would  be  likely  to 
use  it.  The  distress  and  alarm  which  pervaded  and  agitated  the 
whole  country  when  the  Bank  of  the  United  States  waged  war 
upon  the  people,  in  order  to  compel  them  to  submit  to  its  demands, 
cannot  yet  be  forgotten.  The  ruthless  and  unspai'ing  temper  with 
which  whole  cities  and  communities  were  oppressed,  individuals 
impoverished  and  ruined,  and  a  scene  of  cheerful  prosperity  sud- 
denly changed  into  pne  of  gloom  and  despondency,  ought  to  be 
indelibly  impressed  on  the  memory  of  the  people  of  the  United 
States.  If  such  was  its  power  in  a  time  of  peace,  what  would  it 
not  have  been  in  a  season  of  war,  with  an  enemy  at  your  doors? 
No  nation  but  the  freemen  of  the  United  States  couhl  have  come 
out  victorious  from  such  a  contest :  yet,  if  you  had  not  conquered, 
the  government  would  have  passed  from  the  hands  of  the  many  to 
the  hands  of  the  few;  and  this  organized  money  power,  from  its 
secret  conclave,  would  have  dictated  the  choice  of  your  highest 
officers,  and  compelled  you  to  make  peace  or  war  as  best  suited 
their  own  wishes.  The  forms  of  your  government  might,  for  a 
time,  have  remained ;  but  its  living  spirit  would  have  departed 
from  it.  .  .  . 

"  It  is  one  of  the  serious  evils  of  our  present  system  of  bank- 
ing, that  it  enables  one  class  of  society,  and  that  by  no  means  a 
numerous  one,  by  its  control  over  the  currency,  to  act  injuriously 
upon  the  interests  of  all  the  others,  and  to  exercise  moi'e  than  its 
just  proportion  of  influence  in  political  affairs.  The  agricultural, 
the  mechanical,  and  the  laboring  classes  have  little  or  no  share  in 
the  direction  of  the  great  moneyed  corporations ;  and,  from  their 
habits  and  the  nature  of  their  pursuits,  they  are  incapable  of  form- 
ing expensive  combinations  to  act  together  with  united  foi'ce. 
Such  concert  of  action  may  sometimes  be  produced  in  a  single  city, 
or  in  a  small  district  of  country,  by  means  of  personal  communica- 
tions with  each  other :  but  they  have  no  regular  or  active  corre- 
spondence with  those  who  are  engaged  in  similar  pursi;its  in  distant 
places  ;  they  have  but  little  patronage  to  give  to  the  press,  and  exer- 
cise but  a  small  share  of  influence  over  it;  they  have  no  crowd  of 
dependents  about  them,  who  hope  to  grow  rich  without  labor,  by 
their  countenance  and  favor,  and  who  are,  therefore,  always  ready 
to  execute  their  wishes.  The  planter,  the  farmer,  the  mechanic, 
and  the  laborer,  all  know  that  their  success  depends  upon  their  own 
industry  and  economy,  and  that  they  must  not  expect  to  become 
suddenly  rich  by  the  fruits  of  their  toil.  Yet  these  classes  of 
society  form  the  great  body  of  the  people  of  the  United  States ; 
they  are  the  bone  and  sinew  of  the  country ;  men  who  love  liberty, 
and  desire  nothing  but  equal    rights  and  equal  laws,  and  who, 


516      CUKEENCY   AND   BANKING   IN   THE  UNITED   STATES. 

moreover,  hold  the  great  mass  of  our  national  wealth,  although  it 
is  distributed  in  moderate  amounts  among  the  million  of  freemen 
who  possess  it.  But,  with  overwhelming  numbers  and  wealth  on 
their  side,  they  are  in  constant  danger  of  losing  their  fair  influence 
in  the  government,  and  with  difficulty  maintain  their  just  rights 
against  the  incessant  efforts  daily  made  to  encroach  upon  them. 
The  mischief  springs  from  the  power  which  the  moneyed  interest 
derives  from  a  paper  currency  which  they  are  able  to  control ; 
from  the  multitude  of  corporations  with  exclusive  privileges,  which 
they  have  succeeded  in  obtaining  in  the  different  States,  and  which 
are  employed  altogether  for  their  benefit ;  and,  unless  you  become 
more  watchful  in  your  States,  and  check  this  spirit  of  monopoly  and 
thiist  for  exclusive  privileges,  you  will,  in  the  end,  find  that  the  most 
important  powers  of  government  have  been  given  or  bartered  away, 
and  the  control  over  your  dearest  interests  has  passed  into  the  hands 
of  these  corporations. 

"  The  paper-money  system,  and  its  natural  associations,  —  monop- 
oly and  exclusive  privileges,  —  have  already  struck  their  roots  too 
deep  in  the  soil ;  and  it  will  require  all  your  efforts  to  check  its 
further  growth,  and  to  eradicate  the  evil.  The  men  who  profit  by 
the  abuses,  and  desire  to  perpetu.He  them,  will  continue  to  besiege 
the  halls  of  legislation  in  the  general  government,  as  well  as  in  the 
States,  and  will  seek,  by  every  artifice,  to  mislead  and  deceive  the 
public  servants.  It  is  to  yourselves  that  you  must  look  for  safety 
and  the  means  of  guarding  and  perpetuating  your  free  institutions. 
In  your  hands  is  rightfully  jdaced  the  sovereignty  of  the  country, 
and  to  you  every  one  placed  in  authority  is  ultimately  responsible. 
It  is  always  in  your  power  to  see  that  the  wishes  of  the  people  are 
carried  into  faithful  execution ;  and  their  will,  when  once  made 
known,  must  sooner  or  later  be  obeyed.  And  while  the  people 
remain,  as  I  trust  they  ever  will,  uncorrupted  and  incorruptible, 
and  continue  watchful  and  jealous  of  their  rights,  the  government 
is  safe,  and  the  cause  of  freedom  will  continue  to  triumph  over  all 
its  enemies. 

"  But  it  will  require  steady  and  persevering  exertions  on  your 
part  to  rid  yourselves  of  the  iniquities  and  mischiefs  of  the  paper 
system,  and  to  check  the  spirit  of  monopoly  and  other  abuses  which 
have  sprung  up  with  it,  and  of  which  it  is  the  main  support.  So 
many  interests  are  united  to  resist  all  reform  on  this  subject,  that 
you  must  not  hope  the  conflict  will  be  a  short  one,  nor  success  easy. 
My  humble  efforts  have  not  been  spared,  during  my  administration 
of  the  government,  to  restore  the  constitutional  currency  of  gold 
and  silver ;  and  something,  I  trust,  has  been  done  towards  the 
accomplishment  of  this  most  desirable  object.  But  enough  yet 
remains  to  require  all  your  energy  and  perseverance.  The  power, 
however,  is  in  your  hands ;  and  the  remedy  must  and  will  be 
applied,  if  you  determine  upon  it." 

This  was  the  first  deliberate  and  successful  attempt  in  this 
country  to  arouse  local  and  sectional  jealousies,  to  array  the 


UNTRUTHFULNESS   OF  JACKSON's   ASSERTIONS.  517 

agricultural  against  the  manufacturing  and  commercial  classes, 
labor  against  capital,  and  the  poor  against  the  rich.     Against 
a  demagogue   so  adroit   and  unscrupulous,  and   who  in  his 
mastery  over  the  baser  instincts  of  the  race  has  never  been 
excelled,  it  was  perhaps  at  the  time  impossible  to  make  head- 
way.    His  prodigious  untruthfulness  and  falsifications  of  his- 
tory would,  at  the  present  day,  defeat  themselves.     No  asser- 
tion could  have  been  more  false  than  that  the  commercial  and 
manufacturing  classes,  the  managers  of  its  Banks,  had,  from 
the  foundation  of  our  government,  been  in  desperate  league 
to  overthrow  the   liberties  of  the  nation,   and   erect  an  un- 
scrupulous  oligarchy  upon  their   ruins,  —  classes  who  of  all 
others  had  the  most  at  stake  in  their  preservation.     The  suc- 
cess which  followed  Jackson's  attack  upon  the  Bank  enables 
us  to  understand  fully  that  which  followed  Jefferson's  attack 
upon  Hamilton,  as  having  for  his  whole  purpose  the  supplant- 
ing by  a  monarchy,  of  the  Republic  which,  with  the  single 
exception  of  Washington,  he  contributed  most  to  establish. 
Hamilton  told  the  people  that  they  requu-ed  a  strong  govern- 
ment, as  a   means  of  dealing   with   the   refractory  elements 
which  existed   on  every  side,  —  that  their   lawless   instincts 
were  not  their  proper  guide.     His  eye  took  in  the  vast  con- 
tinent upon  which  only  a  lodgement  had  then  been  made  ; 
and  his   polity  was  framed  in    view   of  its    possession  by  a 
people  whose  sectional  jealousies  and  peculiarities  were  to  be 
controlled    by   laws   of  universal   application,   supported   by 
adequate   provision    for  their   vigorous  enforcement.     In  his 
presence  every  indolent,   indifferent,    incapable,  and   lawless 
nature  stood  rebuked,  and  instinctively  rallied  itself  around 
the  banner  of  his  great  enemy  and  rival.     All  excellence  that 
rises  much  above  the  ordinary  level  is  a  dangerous  possession, 
especially  when  it  assumes  to  direct  and  control  weaker  or 
baser  natures  than  its  own.     By  dextrous  appeals  to  the  pas- 
sions and  prejudices  of  the  people,  Jefferson  persuaded  them 
that  Hamilton,  by  opposing  license,  was  an  enemy  of  civil 
liberty.     Under  such  a  charge,  which  came  to  be  considered  as 
proved,  —  under  such  a  load  of  obloquy,  his  memory  rested 
till  the  War  of  the  Rebellion.     Till  then  Jefferson  was  the 
demigod  of  the  nation.       By  that  event  was  he  completely 
dethroned.     Then  for  the  first  time  had  Hamilton  a  standing 
in  the  court  of  the  nation,  a  right  even  to  be  heard.    Jefferson 


518      CURKENCY   AND   BANKING   IN   THE   UNITED    STATES. 

then  took  the  place  of  Hamilton,  to  receive  in  full  measure, 
from  being  all  the  more  deserved,  the  obloquy  and  disgrace 
which  he  had  heaped  upon  the  latter.  The  event  of  the  war 
has  been  equally  fatal  to  Jackson.  Jefferson,  typifying  ideas, 
held  Ins  place  so  long  as  these  remained  in  the  ascendant. 
Jackson's  attack  upon  the  Banks,  and  upon  the  commercial 
classes,  was  simply  an  outburst  of  passion  and  hate,  hardly 
fitted  to  survive  the  moment  of  its  expression.  The  political 
reputation  which  he  enjoyed,  he  derived  largely  from  the 
founder  of  the  dynasty  of  which  he  was  a  conspicuous  member, 
—  a  dynasty  which,  it  is  to  be  hoped,  is  for  ever  overthrown. 

"Who  are,  or  rather  who  were,  the  dangerous  classes  in  this 
country,  —  those  most  to  be  feared  during  the  epoch  of  Jack- 
sonism?  The  wliites  of  the  South  and  South-west,  whose 
moral  sense  had  been  subverted  by  their  "•  peculiar  institu- 
tion ; "  who,  drawing  their  subsistence  chiefly  fi'om  the  soil 
they  occupied,  had  the  least  at  stake  in  the  maintenance  of 
social  and  political  order ;  whose  vanity  and  sectional  jeal- 
ousies had,  from  the  foundation  of  the  government,  been  so 
flattered  by  demagogues  that  they  came  to  regard  their  law- 
less instincts  as  the  highest  expression  of  political  and  social 
wisdom  ;  who,  from  their  isolation,  could  see  nothing  better 
in  the  world  than  their  own  experience ;  who  regarded  the 
least  restraint  imposed  by  others  to  be  tyranny,  to  be  resisted 
by  the  extremest  means,  and  who  stood  ready  to  renounce  their 
allegiance  to  the  general  government  the  moment  it  came  to 
be  administered  by  those  entertaining  sentiments  different  from 
their  own.  The  fate  of  such  a  people,  unless  rescued  from 
their  condition,  is  either  to  become  the  victims  of  despotism, 
or,  like  those  of  Mexico,  to  lose  the' coherence  necessary  to  the 
existence  of  any  efiicient  and  stable  form  of  government. 
Such,  down  to  the  close  of  the  war  of  the  Rebellion,  were  the 
dangerous  classes  in  the  United  States.  We  are  now  in  a 
position  to  take  a  retrospect  of  the  past,  and  to  determine 
accurately  the  relation  of  Jefferson  and  Jackson,  and  the  polit- 
ical school  of  which  they  were  the  most  conspicuous  represen- 
tatives, to  the  great  crisis,  the  result  of  which  is  to  effect  a 
radical  change  in  the  policy  of  our  government  and  the  char- 
acter of  our  people.  We  have  passed  through  a  great  revolu- 
tion, in  which  social  order  was  overturned,  the  industries  and 


WHO   WERE   THE   DANGEROUS   CLASSES  ?  519 

commerce  of  the  country  for  a  time  destroyed,  and  innumerable 
lives  sacrificed,  upon  pretexts  no  more  to  be  justified  than  re- 
sistance to  restraints  imposed  upon  any  lawless  passion  or  act. 

Who,  at  the  time  of  which  we  are  speaking,  were  the  least 
dangerous  classes,  —  in  other  words,  who  were  the  great  con- 
servators of  the  peace  and  order  of  society?  Merchants, 
manufacturers  and  bankers,  who  always  had  the  greater  part 
of  what  they  possessed  in  the  hands  of  the  public,  and  who 
suffered  from  the  slightest  social  or  political  disturbance. 
A  commercial  peojjle  are  necessarily  pacific  and  orderly.  Such 
have  been  throughout  history  the  upholders  of  freedom,  as 
production  and  trade  are  in  ratio  to  the  degree  in  which  this 
is  enjoyed. 

The  preceding  remarks  will  find  complete  confirmation  in 
an  examination  of  the  methods  and  operations  of  the  Bank  of 
the  United  States.  It  established  branches  in  all  the  more 
important  towns  of  the  country.  Wherever  established,  they 
received  the  notes  and  credits  of  all  the  State  Banks  in  good 
standing,  both  on  deposit  and  in  the  payment  of  their  bills, 
as  a  means  of  increasing  the  amount  of  their  loanable  capital. 
Without  such  deposits,  there  would  be  no  inducement  to  their 
establishment,  as  without  them  their  profits  would  not  equal 
the  ordinary  rates  of  interest  on  their  own  capital  employed. 
The  greater  the  degree  of  the  general  welfare,  the  greater 
would  be  the  amount  of  their  deposits,  the  greater  their  loans, 
and  the  greater  the  certainty  of  their  payment.  The  healthier 
the  condition  of  production  and  trade,  the  greater  the  profit, 
has  come  to  be  an  axiom  among  men  of  affairs.  It  is  for  the 
interest  of  great  institutions,  like  the  Bank  of  England  and 
the  Bank  of  the  United  States,  to  sustain  all  smaller  ones. 
They  cannot  oppress  them,  so  long  as  the  latter  are  adequately 
managed.  A  Bank  with  a  capital  of  $100,000  may  be  just  as 
strong  in  ratio  to  its  liabilities  as  a  Bank  of  $100,000,000. 
Each  are  equally  independent  and  each  equally  at  the  mercy 
of  the  other.  As  the  money  in  which  the  Bank  of  the 
United  States  dealt  was  largely  created  by  smaller  Banks  and 
bankers,  it  was  always  for  its  interest  that  it  should  have  an 
actual  equal  to  its  nominal  value :  otherwise  it  might  directly 
lose  by  taking  it.  It  was  for  its  interest  that  every  Bank 
should  remain  in  a  sound  condition.  If  any  became  embarrassed, 
the  biUs  of  merchants  would  be  less  promptly  paid.     These 


520      CURRENCY   AND   BANKING  IN   THE   UNITED   STATES. 

merchants  might  be  the  customers  of  the  United  States  Bank, 
which  might  have  a  portion  of  the  bills  that  would  not  be 
paid  under  discount.     Merchants,  manufacturers,  and  bankers, 
in  fact,  constitute  one  great  firm.     The  loss  of  one  is  the  loss  of 
all.     The  loss  suffered  by  any  one  member  will  be  in  ratio  to 
the  extent  of  his  operations.     As  those  of  the  United  States, 
or  of  its  branch,  wherever  it  had  one,  were  usually  greater  than 
those  of  any  State  Bank,  where  the  former  was  established,  it 
took  the  largest  share  of  any  loss  that  might  be  sustained. 
It  would,  consequently,  have  the  same  motive  for  sustaining 
State  Banks  as  it  would  for  sustaining  one  of  its  own  cus- 
tomers, and  would  do  all  that  it  could  properly  do  to  keep 
them  from  failing.     If  it  erred  at  all,  it  would,  as  toward  its 
own  customers,  always  err  on  the  side  of  leniency.     With  it, 
duty,  inclination  and  self-interest  would  always  go  together. 
It  would  always  desire  to  see  an  improvement  in  the  morals  of 
a  community,  as  the  welfare  of  the  nation  would  always  be 
in  ratio  to  its  good  conduct.     It  would  always  desire  to  see  it 
become  more  intelligent,  that  its  labor  might  be  more  profit- 
ably employed.     It  would  always  desire  to  see  freedom  pro- 
moted,  as  the  essential   condition    of  production  and  trade. 
General  Jackson  could  charge  that  underwriters  would  insure 
rotten   sliips,    or  put   in   command   of  their   risks   ignorant, 
drunken,  and  dishonest  captains  and  crews,  —  nay,  would  set 
them  on  fire,  knowing  that  they  themselves  would  have  to 
pay  the  losses,  —  with  the  same  reason  that  he  asserted  that  the 
managers  of  the  Bank  were  in  conspu'acy  to  destroy  the  well- 
being  and  morality  of  society.     So  far  from  this  being  the 
case,  there  is  no  moraht}-,  using  the  word  in  its  broadest  sense, 
so  high  as  that  of  merchants,  bankers,  and  manufacturers,  for 
the  reason  that,  from  the  elevated  positions  they  occupy,  they 
can  see  more  clearly  than  others  the  consequences  of  any  im- 
moral act ;  and,  from  the  magnitude  of  their  transactions,  have 
vastly  more  at  stake  than  others  in  the  result. 

Early  in  1832,  four  years  before  it  was  to  expire,  the  Bank 
memorialized  Congress  for  an  extension  of  its  charter.  Tliis 
application  at  once  brought  the  controversy  to  a  direct  issue. 
General  Jackson  not  only  declared  the  Bank  to  be  unconstitu- 
tional, that  its  existence  was  incompatible  with  the  liberties 
of  the  country,  but  that  it  was  insolvent,  and  an  unsafe  de- 


RAPID   INFLATION   OF   THE   CUEEENCY.  521 

pository  of  the  public  monej's.  To  these  charges,  the  House 
of  Representatives,  in  which  the  administration  had  a  very  large 
majority  on  other  matters,  replied,  by  a  vote  of  110  to  46,  that 
the  public  moneys  were  safe  in  the  Bank ;  and  by  a  vote  of 
106  to  84  extending  its  charter  for  twenty  years.  The  Senate 
concurred  in  the  last  measure  by  a  vote  of  28  to  20.  It  was 
promptly  vetoed  by  the  President. 

As  the  re-election  of  General  Jackson,  with  a  largely  in- 
creased majority  of  the  House  in  his  favor,  for  a  second  term, 
which  would  not  expire  until  after  the  termination  of  the 
charter  of  the  Bank,  precluded  all  expectation  of  its  renewal, 
the  necessity  of  filling  up  the  vacuum  which  was  so  soon  to  be 
created  by  the  withdrawal  of  $35,000,000  of  banking  capital, 
of  $21,355,724  of  notes,  and  $22,671,431  of  deposits,  making  a 
total  circulation  of  $44,027,155,  —  equalling  fully  one-third  of 
the  amount  of  that  of  all  the  Banks  in  the  countrv,  —  neces- 
sarily  attracted  the  attention  of  the  legislatures  of  the  several 
States.  It  was  natural  that  each  one  should  feel  called  upon 
to  make  provision  for  a  portion  of  the  capital  and  circulation 
that  were  so  soon  to  be  withdrawn.  In  tliis  way,  without  per- 
ception of  its  process,  a  sentiment  in  favor  of  the  creation  of 
Banks  got  hold  of  the  community,  —  a  sentiment  of  all 
others  the  most  to  be  dreaded,  for  the  reason  that  their 
creation  to  supply  an  anticipated  deficiency  of  the  currency, 
and  not  for  the  purpose  of  loaning  capital,  is  always  at- 
tended by  the  most  disastrous  consequences.  After  a  people 
have  for  a  long  time  been  habituated  to  a  sound  currency,  they 
are  in  a  conrlition  most  favorable  for  the  imposition  of  an  un- 
sound one.  The  precedents  of  the  past  are  accepted  as  a 
guide  for  the  present,  so  that  adventurers  who  in  such  a  state 
of  the  public  mind  can  obtain  authority  for  the  issue  of  paper 
money  are  likely  to  reap  a  rich  harvest.  The  currency,  from 
1826  to  1830,  whether  furnished  by  the  National  or  State 
institutions,  had  suffered  so  few  fluctuations  that  its  value  was 
assumed  as  a  matter  of  course.  In  1830,  there  were  329 
Banks,  including  the  National  one,  in  operation  in  the  country, 
having  a  share  capital  equalling  $145,192,268.  Their  note 
circulation,  at  the  time,  equalled  $61,328,898  ;  their  deposits, 
$55,559,928  :  making  a  total  circulation  of  $116,888,826.  The 
number  of  Banks  in  the  United  States  on  the  1st  of  Januarv, 


522      CURRENCY   AND   BANKING  IN   THE   UNITED   STATES. 

1820,  equalled  307  ;  tbeir  share  capital  $137,110,641 ;  their 
note  circulation,  $44,863,344;  their  deposits,  $35,950,479: 
making  a  total  circulation  of  $80,813,823.  The  rate  of  in- 
crease of  the  number  of  Banks  in  the  ten  years  equalled  7  per 
cent ;  that  of  their  capital,  6  per  cent ;  that  of  their  circula- 
tion, including  notes  and  deposits,  47  per  cent.  The  rate  of  in- 
crease of  the  circulation  undoubtedly  corresponded  very  nearly 
to  that  of  the  production  and  trade  of  the  country.  It  is  a 
significant  fact  in  favor  of  the  general  soundness,  that  this 
in'crease  was  not  accompanied  by  any  considerable  increase 
in  the  number  of  Banks,  or  in  the  amount  of  their  nominal 
capital.  The  increased  demand  for  money  was  met  by  the 
existing  institutions,  by  an  increase  of  their  reserves.  So 
long  as  this  is  the  case,  the  money  market  will  always  be  in 
great  measure  free  from  disturbance.  Those  who  supply  the 
banking  accommodations,  so  long  as  they  are  not  distracted  or 
interfered  with  by  any  new  or  hostile  elements,  will  always 
proportion  their  operations  to  their  means.  Their  nominal 
may  have  no  relation  whatever  to  their  available  capital.  The 
rapid  creation  of  new  Banks  is  always  followed  by  great  mone- 
tary disturbances,  for  the  reason  that  their  issues  do  not  pro- 
ceed regularly  and  normally,  bearing  a  proper  relation  to  the 
wants  of  the  public,  but  to  the  real  or  fancied  interests  of 
those  who  control  them. 

There  are  no  means  of  ascertaining  the  rate  of  increase  of 
the  number,  capital,  and  operations  of  the  Banks  from  Jan.  1, 
1830,  to  Jan.  1, 1834.  We  are  indebted  to  Mr.  Gallatin's  "  Con- 
siderations on  the  Currency  "  for  their  number,  capital,  and 
circulation,  at  the  former  date.  His  estimates,  which  were 
made  with  great  care,  are  probably  very  near  the  mark.  In 
1832,  Congress  directed  the  Secretary  of  the  Treasuiy  to  pro- 
cure and  publish,  annually,  statements  of  the  number  of  Banks 
in  each  State,  with  the  amount  of  their  capital,  and  of  the 
nature  and  extent  of  their  operations.  The  returns  first  ob- 
tained and  published  were  those  which  represented  their  num- 
ber and  condition  on  the  1st  of  January,  1834.  Since  that 
time,  similar  statements  have  been  annually  made.  At  the  date 
last  named,  the  number  of  Banks  in  operation  equalled  506, 
against  329  on  the  1st  day  of  January,  1830, — the  time  that 
General  Jackson  began  his  attack  upon  the  United  States 
Bank,  and  his  "  experiments  for  the  reformation  of  the  cur- 


I 


REMOVAL   OF   THE   DEPOSITS.  523 

renc3^"  The  rate  of  increase  in  their  number  during  the  four 
years  equalled  53  per  cent.  The  amount  of  their  capital 
increased,  in  the  same  time,  from  $145,192,268  to  -^200,005,944, 
or  at  the  rate  of  37.7  per  cent.  Their  circulation  incfeased 
from  161,328,878  to  194,839,570,  or  at  the  rate  of  54.6  ;  their 
deposits,  from  $55,559,928  to  $75,666,986,  or  at  the  rate  of 
86.2  per  cent.  The  increase  of  their  circulation,  including 
notes  and  deposits,  equalled  45.2  per  cent.  The  preceding 
statements  show  the  magnitude  of  the  inflation  which  had 
taken  place  so  early  as  Jan.  1,  1834.  The  period  from  1830 
to  1834  was  distinguished  by  no  remarkable  advance  in  the 
industries  or  commerce  of  the  country.  It  is  not  probable  that 
any  greater  rate  was  required  from  1830  to  1834  than  from 
1820  to  1830.  At  the  rate  of  increase  during  the  latter  period, 
the  number  of  Banks  which  would  have  been  in  operation  on 
the  1st  day  of  January,  1834,  would  have  been  338  ;  their  share 
capital,  $151,190,3^0 ;  their  note  circulation,  $70,330,348 ; 
their  deposits,  $63,404,856.  The  excess  of  increase  in  the 
number  of  the  Banks  equalled  168  ;  of  their  capital,  $48,815,664 ; 
of  their  note  circulation,  $24,509,222;  of  their  deposits, 
$12,262,130.  It  will  be  seen  that  the  excess  of  circulation  was 
in  great  part  made  up  of  notes.  The  inflation  must  in  a  great 
measure  have  been  caused  by  new  Banks,  which  were  set  on 
foot  mostly  in  small  towns.  The  circulation  of  such  necessarily 
consisted  of  notes. 

The  inflation,  which  began  so  soon  as  it  was  seen  that  the 
attack  upon  the  Bank  might  succeed,  became  excessive  in  the 
early  part  of  1833.  It  was  then  in  a  condition  to  be  greatly 
affected  by  any  untoward  event.  This  speedily  came,  in 
October  of  that  year,  in  the  order  for  the  removal  of  the  i^ublic 
monej^s  then  held  by  the  Bank,  on  deposit,  to  the  amount  of 
about  $10,000,000.  The  transfer  at  that  time  of  so  large  a  sum 
from  one  institution  to  others  could  not  have  taken  place 
without  creating  great  disturbance,  even  had  the  act  been  a 
perfectl}^  legal  and  proper  one.  As  it  was  considered  highly 
revolutionary  as  well  as  injurious,  a  great  shock  was  given  to 
public  confidence,  and  great  monetary  stringency  was  the 
necessary  result.  People  did  not  dare  to  lend,  or  Banks  to 
discount,  till  matters  assumed  a  more  satisfactory  shape.  The 
act  was  strongly  opposed  by  the  best  men  of  the  President's 
own  party.  Both  Mr.  Van  Buren  and  Mr.  Wright  believed  it 
was  ill-advised,  and  doubted  its  legality.     Mr.  Duane,  then 


52^       CUREEXCY  AXD   BANKING   IN   THE   UNITED   STATES. 

Secretar}'  of  the  Treasury,  refused  to  execute  the  order  of  the 
President.  He  was  removed,  and  his  place  filled  by  a  more 
supple  tool,'  who  was  in  time  further  rewarded  for  his  servility, 
by  being  made  Chief  Justice  of  the  Supreme  Court  of  the 
United  States.  This  appointment  was  undoubtedly  made  in 
view  of  the  reversal,  should  occasion  offer,  of  the  decisions  of 
Judge  Marshall  affirming  the  constitutionality  of  the  Bank ; 
and  of  the  establishment,  by  judicial  authority,  of  the  doctrines 
of  Mr.  Jefferson  as  to  the  nature  of  our  government. 

As  great  distress  everywhere  followed  the  removal  of  the 
deposits,  delegation  after  delegation,  representing  the  various 
interests  of  the  country,  waited  upon  the  President,  to  state 
their  condition,  and  solicit  his  favorable  action.  As  the  re- 
moval was  his  act,  the  distress  complained  of  was  in  a  measure 
charged  upon  liim  ;  and  as  he  was  influenced  in  all  he  had  done 
by  no  higher  motive  than  to  gratify  an  old  pique,  or  to  revenge 
himself  upon  the  Bank  for  having  stood  in  the  way  of  reward- 
ing his  partisans,^  he  could  not  conceive  these  delegations  to 

1  To  find  places  for  the  hungry  crew  that  followed  in  his  train,  General 
Jackson,  soon  after  his  accession,  sought  to  procure  tiie  removal  of  Mr.  Jeremiah 
Mason  from  the  presidency  of  the  branch  Bank  at  Portsmouth,  New  Hampshire. 
The  charges  made  against  Mr.  Mason  were  that  "  small  and  safe  loans  had  been 
refused  to  business  men  in  Portsmouth,  while  at  the  same  time  large  sums  were 
located  out  of  the  State  at  greater  risks."  These  charges  were  examined  into 
by  the  parent  Bank,  and  found  to  be  utterly  groundless.  Tlie  evidence  seemed 
entirely  satisfactory  to  the  Secretary  of  the  Treasury.  Not  so  to  General 
Jackson  :  he  was  determined  upon  revenge.  Mason  was  an  "  old  Federalist," 
for  whom  Isaac  Hill,  a  famous  New  Hampshire  politician  holding  an  important 
office  under  government,  and  one  of  General  Jackson's  most  trusted  advisers, 
entertained  the  greatest  hatred.  He  inflamed  the  mind  of  the  President  with 
artful  representations  that  the  action  of  the  Bank  in  this  matter  was  evidence  of 
a  great  combination  of  capitalists,  headed  by  the  Bank,  in  opposition  to  liim :  - 

"  That  the  reader,"  says  Parton,  "  may  see  the  movements  of  this  gentleman," 
[Isaac  Hill]  "as  they  appeared  to  General  Jackson,  and  that  lie  may  fully 
understand  the  process  by  which  the  administration  were  brought  into  collision 
with  the  parent  Bank,  I  will  present  here  a  brief  condensation  of  the  papers  and 
letters  relating  to  the  Portsmouth  affair,  in  the  order  in  which  they  were  pro- 
duced. The  correspondence  began  in  June,  and  ended  in  October.  I  beUeve 
myself  warranted  in  the  positive  assertion,  that  this  correspondence  relating  to 
the  desired  removal  of  Jeremiah  Mason  was  the  direct  and  real  cause  of  the 
destruction  of  the  Bank.  If  the  Bank  liad  been  complaisant  enough  to  remove 
a  faithful  servant,  General  Jackson,  I  am  convinced,  would  never  have  opposed 
tlie  rechartering  of  the  institution."  —  Life  of  General  Jackson,  by  James  Par- 
ton,  vol.  iii.  p.  260. 

An  earlier  affront,  undoubtedly,  still  rankled  in  General  Jackson's  bosom :  — 

"  An  incident,"  to  quote  further  from  Parton,  "  occurred  during  the  stay  of 
General  Jackson  at  New  Orleans,  which  was  afterwards  supposed  to  have  made 


I 


I 


Jackson's  treatment  of  the  new  york  committee.  525 

be  governed  by  any  higher  motives  than  his  own.  He  regarded 
all  presentations  of  the  conditions  of  the  country  as  insults  to 
himself,  and  was  prompt  to  repay  them  in  kind.  Among  the 
delegations  was  one  representing  the  bankers  and  merchants 
of  New  York,  having  upon  it  six  thousand  names,  asking 
that  the  deposits  might  be  restored.  This  delegation  was 
headed  by  Mr.  James  G.  King,  of  New  York,  —  a  man  of  the 
highest  respectability  and  character,  and  of  stately  manners  ; 
whose  consequence  was  not  a  little  increased  by  being  a  son  of 
the  celebrated  Rufus  King,  —  one  of  the  most  honored  in  the 
catalogue  of  our  great  names.  The  following  description 
of  the  reception  with  which  this  delegation  met  is  taken  from 
Parton's  Life  of  Jackson  :  — 

"  The  adventures  of  one  of  these  deputations,  a  friendly  inform- 
ant, who  witnessed  their  interview  with  the  President,  enables  me 
to  relate.  The  petition  of  the  New  York  merchants,  bearing  six 
thousand  siguatvires,  was  intrusted  to  the  care  of  a  deputation  of 
great  bankers  and  great  merchants,  headed  by  Mr.  James  G.  King. 
When  these  worthy  gentlemen  entered  the  office  of  the  President, 
at  the  White  House,  they  discovered  him  seated  at  a  table  writing, 
with  a  long  pipe  in  his  mouth,  which  rested  on  the  table,  and  re- 
vealed the  intensity  of  the  President's  interest  in  his  work  by  the 
volumes  of  smoke  Vhich  gushed  from  its  blackened  bowl. 

" '  Excuse  me  a  moment,  gentlemen,'  said   the.  President,  half 
rising,  and  bowing  to  the  group.    '  Have  the  goodness  to  be  seated.' 
"  In  a  few  minutes  he  pushed  back  his  paper,  rose,  and  said,  — 
"  '  Now,  gentlemen,  what  is  your  pleasure  with  me?' 
"  The  members  of  the  deputation  were  introduced  to  the  Presi- 
dent by  the  gentleman  whose  recohections  of  the  scene  I  am  now 
recording.     Sir.  King  then  began,  in  his  usual  deliberate  and  dig- 

a  lasting  impression  upon  his  mind,  and  to  have  been  a  remote  cause  of  import- 
ant events.  He  came  into  collision  with  the  Bank  of  the  United  States.  Desir- 
ing to  take  with  him  to  Florida  a  sum  of  money,  with  which  to  defray  the  first 
expenses  of  organizing  his  government,  he  sent  an  aid-de-camp  to  the  branch  of 
the  United  States  Bank  at  New  Orleans  to  learn  whether  the  Bank  would  ad- 
vance ten  or  fifteen  thousand  dollars  on  a  draft  to  be  drawn  by  General  Jackson 
upon  the  Department  of  State.  The  messenger  returned  with  the  reply,  that  the 
branch  Bank  had  no  authority  to  advance  money  upon  drafts.  The  mother 
Bank,  said  the  cashier,  had  expressly  forbidden  him  to  negotiate  drafts.  Tlie 
aide-de-camp  remonstrated,  and  pointed  out  the  inconvenience  tliat  might  result 
from  the  refusal ;  but  the  cashier  was  immovable,  as  he  was  bound  to  be."  — Life 
of  Andrew  Jackson,  vol.  ii.  p.  596. 

Such  were  the  causes,  or  rather  the  occasion,  which  led  to  General  Jackson's 
famous  war  upon  the  Bank  of  the  United  States,  which  aroused  the  fiercest 
personal  and  political  animosities,  and  which  was  so  disastrous  in  its  conse- 
quences to  the  whole  nation.  It  could  never  have  become  such  a  potent  element 
of  strife,  but  from  its  relation  to  the  great  questions  which  concerned  the 
nature  and  powers  of  the  central  government. 


526      CURKEXCY  AKD    BANKING   IN   THE   UNITED    STATES. 

nifiecl  manner,  to  state  the  object  of  the  interview;  which  was  to 
inform  the  President  of  the  embarrassment  under  which  the  mer- 
chants of  New  York  were  hiboring,  and  to  ask  such  relief  as  the 
executive  alone  was  supposed  to  be  able  to  afford.  Mr.  King  had 
uttered  only  a  few  sentences  of  the  address  which  he  had  meditated, 
when  the  president  interrupted  him  with  an  irrelevant  question  : 

" '  Mr.  King,  you  are  the  son  of  Rufus  King,  I  believe  ? '  * 

"  '  I  am,  sir,'  was  the  reply. 

"  Whereupon  the  President  broke  into  a  harangue  which  aston-  i 

ished  the  grave  and  reverend  seigniors  to  whom  it  was  addressed.  w 

"  '  Well,  sir,'  said  the  President,  '  Kufus  King  was  always  a  Fed-  « 

eralist,  and  I  suppose  you  take  after  him.  Insolvent,  do  you  say? 
What  do  you  come  to  me  for,  then  ?     Go  to  Nicholas  Biddle.     We  g 

have  no  money  here,  gentlemen.     Biddle  has  all  the  money.     He  ' 

has  millions  of  specie  in  his  vaults  at  this  moment  lying  idle,  and 
yet  you  come  to  me  to  save  you  from  breaking.     I  tell  you,  gentle-  « 

men,  it's  all  politics.' 

"  He  continued  to  speak  in  a  strain  like  this  for  fifteen  minutes, 
denouncing  Biddle  and  the  Bank  in  the  manner  usual  to  him,  and 
gradually  Avorking  himself  up  to  a  high  degree  of  excitement.  He 
laid  down  his  pipe  ;  he  gesticulated  wildly  ;  he  walked  up  and  down 
the  room  ;  and  finished  by  declaring,  in  respectful  but  unmistak- 
able language,  that  his  purpose  was  unchangeable,  not  to  restore  the 
deposits.  He  ceased  at  length.  The  deputation,  correctly  sur- 
mising that  their  mission  was  a  failure,  rose  to  retire,  and  were 
dismissed  by  the  President  with  the  utmost  politeness.  The  gentle- 
man who  had  introduced  the  deputation  left  the  apartment  with 
them ;  but  was  overtaken  by  a  messenger,  as  he  was  descending  the 
stairs,  who  informed  him  that  the  President  wished  him  to  return. 
He  accordingly  went  back  to  the  oflice,  where  he  found  the  Presi- 
dent exulting  over  the  result  of  the  interview.  '  Oh  !  didn't  I  man- 
age them  well  ? '  he  exclaimed.  The  only  object  of  the  President 
in  calling  him  back  was  to  enjoy  a  chuckle  with  him  over  the 
scene  that  had  transpired."  ^ 

Such  was  the  manner  in  which  were  received  delegations 
composed  of  the  most  distinguished  and  most  honored  citizens 
of  the  republic.  Was  it  strange  that  other  nations  should 
regard  our  government  with  disgust  and  wonder,  ignorant  of 
the  cause  of  such  brutalities,  and  of  the  good  which  still  existed 
and  grew  strong  by  their  side  ? 

As  the  stringency  of  1833-34  was  not  followed  by  the 
suspension  of  specie  payments,  there  was  no  lack  of  money  so 
soon  as  confidence  was  in  a  measure  restored.  After  a  slight 
check,  a  spirit  of  speculation  again  seized  upon  the  nation,  the 

1  Life  of  Andrew  Jackson,  vol.  iii.  pp.  549,  550. 


THE   EFFECT   OF   THE   IISTLATION   UPON   PEICES.         527 

streng'th  of  which  was  strikingly  illustrated  by  the  creation, 
in  18o4,  of  198  new  Banks,  whose  aggregate  capital  equalled 
$31,144,393.  The  aggregate  note  circulation  of  the  country 
increased,  during  the  year,  from  $94,839,570  to  $103,692,495  ; 
the  deposits,  from  $75,666,986  to  $83,180,365.  All  this  was 
but  a  prelude  to  the  mighty  movement  which  was  to  follow. 
On  the  first  day  of  January,  1836,  the  note  circulation  of  the 
Banks  had  reached  $140,301,038,  and  their  deposits  $115,- 
104,440 ;  making  the  total  increase  of  circulation  $68,632,618 
in  a  single  year,  —  the  rate  of  increase  for  the  year  equalling 
36.6  per  cent.  The  inflation  continued,  although  with  less 
force,  during  the  following  year.  On  the  first  day  of  January, 
1837,  the  number  of  Banks  had  increased  to  788 ;  their  paid- 
up  share  capital,  to  $290,772,091 ;  their  note  circulation,  to 
$149,185,890;  their  deposits,  to  $127,397,185:  making  the 
total  circulation  $276,583,075,  against  $116,888,826  in  1830, 
—  the  rate  of  increase  in  the  seven  years  equalling  136.6 
per  cent. 

The  result  of  this  enormous  increase  of  paper  money  was 
an  extravagance  of  expenditure  never  before  seen  in  this 
country ;  nor  in  any  other,  with  the  exception  of  England 
durino^  the  existence  of  the  South  Sea  Bubble,  and  of  France 
during  that  of  the  Mississippi  Scheme.  There  were,  literally, 
not  sufficient  objects  of  expenditure  within  reach  of  the  people. 
To  provide  them,  vast  importations  of  foreign  goods  were  made  ; 
the  amount  of  these  increasing  from  $108,118,310,  in  1833,  to 
$189,980,035,  in  1836.  After  speculation  had  raised  the  price 
of  all  kinds  of  merchandise  to  an  extraordinary  pitch,  it  was 
turned  toward  landed  propert}^  which,  throughout  the  whole 
country,  was  carried  to  prices  often  exceeding  many  times  its 
value.  There  was  at  the  time  one  great  holder  of  this  kind  of 
property,  —  the  United  States,  —  which  continued  to  sell  at  the 
old  rate  of  $1.25  the  acre.  Here  seemed  to  be  opened  an 
inexhaustible  mine.  All  that  had  to  be  done  to  realize  imme- 
diate wealth  was  to  buy  at  this  rate,  and  sell  at  prices  five  or 
ten  fold  greater.  The  consequence  was  that  the  sales  of  land 
rose  from  3,856,227  acres,  realizing  the  sum  of  $4,972,284,  in 
1833,  to  20,074,870,  realizing  $25,167,833,  in  1836.  The 
receipts  from  the  public  lands  in  1835  and  1836  equalled  the 
sum  of  $41,167,637.  These  immense  sales  were  apparently 
the  only  thing  that  attracted  the  attention  or  the  apprehensions 


528      CUKEENCY  AND   BANKING  IN  THE   UNITED    STATES. 

of  the  government.  In  order  to  check  them,  it  issued,  on  the 
11th  of  July,  1836,  the  famous  "Specie  Circular,"  which 
required  all  payments  for  lands  to  be  made  in  specie.  This 
circular  had  little  effect  so  long  as  the  Banks  continued  to  pay 
coin,  but  was  one  of  the  potent  causes  in  producing  the  catas- 
trophe which  was  already  near  at  hand.i 

The  sales  of  land  and  the  excessive  importations  of  foreign 
merchandise  increased  the  revenues  of  government  to  an 
extraordinary  degree,  although  the  rates  of  imposts  had  been 
largely  reduced  in  1832,  to  induce  South  Carolina  to  recede 
from  her  threats  of  nullification,  or  as  a  concession  for  receding 
from  them.  The  result  of  this  movement  was  a  complete  vic- 
tory on  her  part.  Her  grievance  was  the  tariff;  to  redress 
which  she  threatened  to  draw  the  sword.  Government,  instead 
of  enforcing  obedience,  yielded  to  her  demands,  setting  the 
example  which  proved  so  fatal  when  the  next  great  crisis 
came.  From  the  excess  of  revenues,  derived  chiefly  from  the 
sale  of  lands,  government  found  itself  in  possession  of  an  enor- 
mous sum  for  which  it  had  no  use.  The  public  debt  had  been 
paid.  It  was  against  the  ideas  and  genius  of  the  people  to 
allow  large  sums  to  remain  idle  in  the  Treasury.  These  arose 
chiefly  from  property  belonging  to  the  whole  nation.  They 
should  be  restored  to  its  rightful  owners.  An  Act  was  accord- 
ingly passed,  in  June,  1836,  providing  that,  after  deducting 
therefrom  the  sum  of  85,000,000,  the  money  that  should  be 
found  in  the  Treasury  of  the  United  States  on  the  first  day  of 
January,  1837,  should  be  deposited  with  the  several  States,  in 
ratio  to  the  number  of  their  Senators  and  Representatives  in 


1  Statement  showing  the  Number  of  Acres  of  Public 
received  therefor,  each  Year,  from  1829  to 


Tears. 

Acres. 

1829   .     .     . 

1,244,860 

1830  .     . 

1,929,733 

1831   .     . 

2,777,856 

1832   .     . 

2,462,342 

1833   .     . 

3,856,227 

1834   .     . 

4,658,218 

1835  .     . 

12,364,478 

1836   .    . 

20,074,870 

1837   .    . 

5,601,103 

1838   .     . 

.      3,414,907 

Amount  received. 

Years. 

$1,572,863 

1839    .      . 

2,433,432 

1840  .     . 

3,557,023 

1841   .     . 

3,115,376 

1842   .     . 

4,972,284 

1843   .     . 

6,099,981 

1844   .     . 

15,999,804 

1845   .     . 

25,167,833 

1846   .     . 

7,007,523 

1847   .     . 

4,305,564 

Lands  sold,  and  the  Amounts 

1847,  inclusive. 

Acres. 

Amount  recelTSd, 

.      4,976,382 

6,464,556 

.      2,236,889 

2,789,637 

.      1,164,796 

1,463,364 

.       1,129,217 

1,417.972 

.      1,605,246 

2,016,644 

.      1,754,763 

2,207,678 

.      1,843,527 

2,470,303 

.      2,263,730 

2,969,637 

.      2,521,305 

3,296,404 

DISTKIBUTION    OF   THE   SURPLUS   REVENUE.  529 

Congress.  The  money  was  nominally  deposited  for  safe- 
keeping, to  be  returned  whenever  it  was  wanted  to  defray  the 
expenses  of  the  general  government,  although  no  one  at  the 
time  supposed  a  dollar  of  it  would  ever  be  returned.  The 
amount  to  be  deposited  was  ascertained  to  be  837,468,859. 
The  deposits  were  to  be  made  in  four  equal  instalments,  —  the 
first  on  Jan,  1,  the  second  on  April  1,  the  third  on  June  1,  and 
the  last  on  Oct.  1,  1837.  They  were  all  to  be  made  in  specie, 
or  its  equivalent ;  and  to  be  paid  from  the  reserves  of  the 
deposit  Banks,  or  by  the  calling  in  of  loans.  This  Act  helped 
to  complete  the  work  begun  by  the  Specie  Circular.  The 
Banks  were  now  placed  between  two  fires,  —  one  from  specu- 
lators in  the  public  lands,  the  other  from  the  States  which  were 
to  have  their  proceeds.  The  demands  of  both  were  to  be  paid 
in  coin.  As  the  deposits  received  by  the  States  were  largely 
distributed  direct  to  the  people,  per  capita,  the  money  paid 
them  was  for  a  long  time  wholly  taken  out  of  the  channels  of 
commerce  and  trade.  By  desperate  efforts,  the  Banks  paid 
the  first  two  instalments,  amounting  to  818,735,430.  They 
were  by  this  time  exposed  to  calls  from  another  quarter,  —  the 
demands  of  the  foreign  trade.  The  imports  for  1836  exceeded 
the  exports  by  861,314,975.  According  to  the  Economists,  the 
nation  was  all  the  richer  by  this  amount.  Foreigners,  unfortu- 
nately, found  themselves  all  the  poorer  by  it,  and  demanded 
something  in  return,  which  the  Banks  were  called  upon  to 
provide.  The  result  was,  that  by  the  time  the  second  instal- 
ment of  the  public  revenues  was  paid,  the  means  of  the  Banks 
were  so  thoroughly  exhausted  that,  in  view  of  the  third 
instalment  which  was  soon  due,  nothing  was  left  to  those 
of  the  city  of  New  York,  upon  whom  the  whole  brunt  fell, 
but  to  suspend  specie  payments ;  which  they  did  on  the  10th 
of  May,  1837.  AU  the  other  Banks  in  the  country  followed 
their  example. 

As  the  Banks  of  the  State  of  New  York  were  the  first  to 
suspend,  they  were,  with  those  of  the  New  England  States, 
the  first  to  resume.  As  their  suspension  was  a  violation  of 
their  charters,  the  legislature  relieved  them  of  the  penalty  by 
allowing  them  a  year  for  this  purpose.  They  so  diligently 
improved  their  time,  that  they  found  no  difficulty  in  resum- 
ing within  the  period  prescribed.     The  Banks  of  New  Eng- 

34 


530      CUERENCY   AND    BANKING   IN   THE   UNITED    STATES. 

land  resumed  at  the  same  time   (May  10,  1838).     Those  of 
New  Jersey,  Pennsylvania,  and  the  States  to  the  South  and 
West,  followed  their  example  later  in  the  season  ;  the  United 
States  Bank  of  the  State  of  Pennsylvania  leading  the  way, 
by  resuming  on  Aug.  13.     Events  showed,  however,  that  the 
resumption'of  all  except  those  of  New  York  and  New  England 
was  premature,  as  they  all  suspended  again  in  October,  1839, 
—  the  Bank  of  Pennsylvania  again   leading  the  way.     This 
Bank  resumed,  for  a  short  time,  early  in  1841.     Those  of  New 
Jersey,  Pennsylvania,  and  the  Southern  and  Western  States, 
resumed  gradually,  without  concert,  as  they  could  provide  the 
means.     It  was  not  till  the  beginning  of  1843  that  the  Banks 
of  the  country  might  be  said  to  be  fairly  upon  a  specie  basis. 
This  was  not  accomplished,  however,  until  their  liabilities  were 
reduced  considerably  below  what  those  of  the  Banks  were  in 
1830,  thirteen  years  Ijefore  I    This  fact  shows  most  strikingly  the 
degree  of  exhaustion  to  which  the  country  was  reduced.     The 
note  circulation  of  the  Banks  on  the  first  of  January,  1843, 
equalled  only  $58,563,608 ;  their  deposits,  156,168,628 :  mak- 
ing a  total  of  1114,732,236,  against  an  aggregate  of  1276,583,070 
in  1836,  $170,506,556  in  1833,  and  $116,883,826  in  1830,  when 
General  Jackson  began  his  famous  experiments  for  the  reforma- 
tion of  the  currency.     Had  the  rate  of  increase  of  the  circulation 
from  1820  to  1830  been  maintained  from  1830  to  1843,  the  total 
at  the  last  date  would  have  equalled  $197,761,749.     There  can 
be  no  doubt  that  the  rate  should  have  been  far  greater  from 
1830  to  1843  than  from  1820  to  1830.     Had  the  currency  not 
been  interfered  with,  the  amount  outstanding  Jan.  1, 1843,  in- 
cluding deposits,  must  have  been  $250,000,000,  — an  amount 
more  than  twice  greater  than  that  actually  in  circulation,  and 
the  whole  of  it  the  equivalent  of  coin.     What  a  prodigious 
perturbation  and  loss  must  have  resulted  from  the  reduction 
of  the  currency,  from  $276,583,070  to  $114,732,236,  in  the 
short  period  of  six  years !     Thousands  of  millions  would  not 
have  sufficed  to  make  it  good.     The  condition  of  the  foreign 
commerce  of  the  country  reflected,  in  a  striking  degree,  that  of 
its  domestic  industries  and  trade.     Its  imports  in  1836  equalled 
$189,980,035.     In  1843,  the  year  after  the  Banks  finally  re- 
sumed, they  equalled  only  $86,333,898  :   the  reduction  in  this 
period  being  $103,646,637,  or  considerably  more  than    one- 
half.     The  imports  for  the  decade  ending  with  1839,  during 


EFFECT   OF   JACKSON'S   ATTACK   TJPOX   THE   BA^TK.      531 

which  General  Jackson's  experiments  were  going  on  and  the 
Banks  were  under  suspension,  equalled  81,196,410,483;  the 
exports,  $1,034,105,475:  the  excess  of  exports  equalling  in 
value  $162,305,008.  In  the  next  decade,  which  was  that  of 
the  recovery  from  Jackson's  experiments  and  the  disasters 
which  followed,  the  imports  equalled  $1,218,341,575;  the 
exports,  $1,266,881,619 :  the  excess  of  exports  over  imports 
for  this  decade  equalling  $48,540,044.  At  the  close  of  the  last 
decade,  the  nation  was  better  off,  so  far  as  its  foreign  commerce 
was  concerned,  than  it  was  at  the  close  of  the  previous  one,  by 
$210,845,052 !  We  know  that  the  Economists  will  assert  that 
it  was  the  worse  off  by  this  amount,  for  the  reason  that,  during 
the  first  decade,  we  got  from  foreigners  merchandise  having  a 
value  of  $162,305,008  greater  than  we  sent  them  (the  differ- 
ence was  our  profit)  ;  while,  during  the  second  decade,  we  sent 
them  merchandise  having  a  value  of  $48, 540,044  greater  than 
that  we  received  in  exchange  from  them.^ 

When  General  Jackson  came  to  the  Presidency,  the  currency 
of  the  country,  as  well  as  its  industries  and  trade,  was  in  an 
eminently  sound  and  healthy  condition.     Its   paper  or  sym- 


1  Statement  showing  the  amount  of  Loans  and  Discounts,  Note  Circulation,  and  Deposits 
of  the  Banks,  the  amount  of  Imports  and  Exports  of  the  United  States,  from  1833  to 
1847,  inclusive. 


Years. 

Loans  and 
Discounts. 

Note 
Circulation. 

Deposits. 

Imports. 

Exporta. 

1833 

.$•324,119,499 

§94,839,570 

$75,666,986 

■$108,118,311 

.$90,140,133 

1834 

365,163,834 

103,692,445 

83,081,365 

126,521,3.32 

104,336,978 

1835 

457,506,080 

140,301,038 

115,104,440 

140,897,742 

121,693.577 

1886 

525,115,702 

149,185,890 

127,397,185 

189,980,035 

128.663,046 

1837 

485,631,687 

116,338,910 

84,691,184 

140,989,217 

117,419,376 

1838 

492,278.015 

135,170,995 

90,240,146 

113,717,404 

108,486,616 

1839 

462,896,523 

106,968,572 

75,696,857 

162,092,132 

121,028,416 

1840 

386,487,662 

107,290.214 

64,890,101 

107,141,519 

132,085.946 

1841 

323,957,569 

83,734,011 

62,408,870 

127,946,177 

121,851,803 

1842 

254,544,937 

58,563,608 

56,168,628 

100,162,087 

104,691,534 

1843 

264,905,814 

75,167,646 

84,550,785 

86,338,398 

112,461,973 

1844 

288,617,131 

89,608,711 

88,020,646 

108,435,035 

111,200,146 

1845 

312,114,404 

105,552,427 

96,913,070 

117,254,664 

114,654.606 

1846 

311,282,945 

105,519,766 

91,792,533 

121,691,797 

113,648,622 

1847 

844,476,542 

128,506,091 

103,226,157 

154,998,928 

158,648,622 

The  returns  for  the  Banks  made  under  date  of  January  are  those  for  the  pre- 
ceding years.  In  the  above  table,  they  are  set  down  for  the  j'ear  to  which  they 
relate,  in  order  to  correspond  with  the  years  for  which  the  imports  and  exports 
are  given. 


532       CURRENCY  AXD   BAXKIXG   IX   THE   UNITED   STATES. 

bolic  money  equalled  about  19  per  head  of  its  population. 
The  ratio  of  the  coin  reserves  of  its  Banks  to  their  liabilities 
equalled  nearly  20  per  cent.  During  his  administration,  the 
number  of  the  Banks  was  increased  from  339  to  788.  Their 
issues  rose  from  $9  per  head  of  population  to  819  per  head, 
while  the  coin  reserves  of  the  Banks  fell  from  about  20  to 
about  13  per  cent  of  their  liabilities  ;  the  latter  being  the  low- 
est point  reached  in  the  history  of  the  Banks  of  the  country. 
In  assuming  to  reform  the  currency,  for  which  he  was  about 
as  competent  as  was  Attila  to  write  a  treatise  upon  Roman 
Law,  or  a  critique  upon  Greek  Art,  he  erected  one  of  the 
most  stupendous,  and  at  the  same  time  one  of  the  most  rotten 
and  unsubstantial  systems  of  paper  money  that  the  world  has 
yet  seen  ;  upon  which,  as  his  perfect  work,  only  two  months 
before  its  fall,  which  was  to  involve  a  nation  in  ruin,  he  pro- 
nounced his  benediction ;  craving  that,  as  a  faithful  public 
servant  having  accomplished  ^he  mission  assigned  him,  he 
might  now  be  allowed  to  pass  on  in  peace  to  his  final  rest. 
After  the  explosion,  eight  long  years  were  required  to  restore 
the  condition  of  the  country  to  the  financial  soundness,  but 
by  no  means  to  the  degree  of  prosperity,  in  wliich  he  found  it. 
Before  specie  payment  could  be  wholly  resumed,  the  currency, 
which  when  he  became  President  equalled  $9  per  head  of 
population,  had  to  be  reduced  to  $4.50  per  head.  In  a  period 
of  profound  peace,  he  brought  upon  the  country  all  the  waste 
incident  to  a  prolonged  war ;  and  still  greater  evils  in  setting 
the  first  example  of  prostituting  the  patronage  of  government 
as  the  reward  of  political  partisanship.  The  nation  has  long 
since  recovered  from  the  material  injur}^  inflicted  upon  it, 
but  it  has  as  yet  made  very  little  progress  in  restoring  the 
standard  of  political  purity  and  decorum,  which  had  been 
maintained  from  the  formation  of  the  government  down  to  his 
accession  to  the  Presidency.^ 

1  "  From  his  home  in  Tennessee,"  says  Bancroft,  "  Jackson  carae  to  the  Presi- 
dency, resolved  to  lift  American  legislation  out  of  the  forms  of  English  legisla- 
tion, and  to  place  our  laws  on  the  currency  in  harmony  witli  tiie  principles  of  the 
Republic.  He  came  to  the  Presidency  of  the  United  States  determined  to 
deliver  the  government  from  the  Bank  of  the  United  States,  and  to  restore  the 
regulation  of  exchanges  to  the  rightful  depository  of  that  power,  —  the  commerce 
of  the  country."*  No  doubt,  Jackson  came,  resolved  to  lift  American  legislation 
out  of  tlie  forms  of  English  legislation  ;  and  he  did  it  most  effectually,  by  substi- 

♦  Bancroft's  Miscellaneous  Works  (Eulogy  on  General  Jackson),  p.  471. 


BRUTALITIES   OF   SAM   HOUSTON.  533 

The  most  melancholy  part  of  this  retrospect  is,  that  the  loss 
and  suffering  brought  upon  the  nation,  by  ignorance,  passion 
and  brutality,  have  not  taught  a  single  lesson  that  has  been 
heeded,  nor,  so  far,  produced  a  single  valuable  residt.  The 
nation  is  more  deeply  involved  in  the  meshes  of  paper  money, 
from  which  there  is  no  apparent  escape,  than  it  has  been  at 
any  time  since  the  foundation  of  the  government.  The  very 
party,  or  the  greater  portion  of  it,  that  abetted  General  Jack- 
son in  his  attack  upon  the  paper-money  system  of  the  country 
are  now  the  chief  supporters  of  that  with  which  the  nation  is 
cursed.  That  we  should  have  learned  nothing  and  gained 
nothing,  or  rather  that  we  should  be  in  a  more  perilous  condi- 

tuting  for  the  deliberate  and  decorous  forms  of  that  country  the  pistol,  the 
bludgeon,  and  the  bowie  knife.  In  1832,  Sam  Houston,  who  had  previously- 
been  Governor  of  the  State  of  Tennessee,  and  Representative  in  Congress  from 
that  State,  and  who  was  subsequently  President  of  the  Republic  of  Texas  and 
for  a  long  time  a  United  States  Senator  from  that  State,  was  in  Washington ; 
and  reference  having  been  made  to  him  in  the  House  of  Representatives  by  a 
member,  Mr.  William  Stanberry  of  Ohio,  as  being  mixed  up  with  contracts  for 
supplying  the  Indian  rations,  he  addressed  a  note  to  Mr.  Stanberry,  asking 
whether  the  allusion  to  him  had  been  correctly  reported.  Mr.  Stanberry  replied 
that  he  would  not  be  called  to  account  for  words  spoken  in  his  place  in  the 
House.  Thereupon  Houston,  who  was  a  man  of  colossal  proportions,  waylaid 
Stanberry,  who  was  a  small  and  feeble  man,  knocked  him  down  with  a  bludgeon, 
and,  after  beating  him  to  his  heart's  content,  left  him,  as  a  United  States  Senator 
who  was  standing  by  and  in  sympathy  with  the  act  testified,  motionless,  and  he 
feared,  dead.  For  this  act  Houston  was  summoned  to  the  bar  of  the  House  for 
a  breach  of  the  privilege  of  its  members.  He  was  zealously  defended  by  Mr. 
Polk,  afterwards  President  of  the  United  States,  on  the  ground  that  it  was  no 
breach  of  privilege  to  waylay  and  knock  down  a  member  of  the  House  for 
words  spoken  in  debate,  provided  such  act  caused  no  interruption  of  its  pro- 
ceedings !  Mr.  Houston  was  allowed  to  defend  himself  in  person  before  the 
whole  House ;  which  he  did,  not  by  denying  the  act,  but  by  maintaining  the  in- 
alienable right  of  every  freeborn  American,  where  he  imagines  his  honor  is 
assailed,  to  take  the  law  into  his  own  hands;  that  to  deny  this  right  would  be  to 
take  away  every  thing  that  rendered  Ufe  dear  and  valuable.  The  following  are 
the  two  last  paragraphs  of  his  defence  :  — 

"  Sir,  when  you  shall  have  destroyed  the  pride  of  American  character,  you 
will  have  destroyed  the  brightest  jewel  that  Heaven  ever  made.  You  will  have 
drained  the  purest  and  the  holiest  drop  which  visits  the  heart  of  your  sages  in 
council,  and  your  heroes  in  the  field.  You  will  have  annihilated  the  principle 
that  must  sustain  that  emblem  of  the  nation's  glory,  and  elevate  tliat  emblem 
above  your  own  exalted  seat.  These  massy  columns,  with  yonder  lofty  dome, 
shall  sink  into  one  crimibling  ruin.  Yes,  sir,  though  corruption  may  have  done 
something,  and  luxury  may  -have  added  her  seductive  powers  in  endangering 
the  perpetuity  of  our  nation's  fair  fame,  it  is  these  privileges  which  still  induce 
every  American  citizen  to  cling  to  the  institutions  of  his  country-,  and  to  look  to 
the  assembled  representatives  of  his  native  land  as  their  best  and  onl_\'  safeguard. 

"  But,  sir,  so  long  as  that  flag  shall  bear  aloft  its  glittering  stars  —  bearing 
them  amidst  the  din  of  battle,  and  waving  them  triumphantly  above  the  storms 


534      CUEREXCY   AND    BA^'KING   IX   THE   UNITED    STATES. 

tion,  and  understand  less  than  ever  the  laws  of  money,  after 
all  the  experience  vre  have  gone  through,  affords  very  little 
comfort  or  hope  for  the  future.  || 

A  few  days  before  the  expiration  of  their  charter,  the  stock- 

of  the  ocean,  so  long,  I  trust,  shall  the  rights  of  American  citizens  be  preserved 
safe  and  unimpaired,  and  transmitted  as  a  sacred  legacy  from  one  generation  to 
another,  till  discord  shall  wreck  the  spheres,  —  the  grand  march  of  all  time  shall 
cease,  —and  not  one  fragment  of  all  creation  be  left  to  chate  on  the  bosom  of 
eternity's  waves  !  "  * 

In  spite  of  Houston's  defence,  the  House  voted  by  a  small  majority  that  a 
breach  had  been  committed;  and  he  was  sentenced  to  a  reprimand,  which  was 
administered  by  the  speaker,  Mr.  Andrew  Stevenson  of  Virginia,  in  a  manner 
•which  showed  that  he  applauded,  rather  than  censured,  the  assault.  Jackson 
highly  approved  of  it ;  remarking  that,  "  after  a  few  more  examples  of  the  same 
kind,  members  of  Congress  would  learn  to  keep  civil  tongues  in  their  heads." 
Although  the  House  voted  that  Houston  deserved  censure,  they  refused  to  ex- 
clude him  from  a  seat  on  their  floor,  to  wliichhe  was  entitled  as  having  previously 
been  a  member. 

Stanberry,  who  was  not  killed,  only  shockingly  bruised,  not  getting  much  satis- 
faction from  the  House,  a  large  number  of  whose  members  regarded  him  as 
rightly  served,  had  the  matter  brought  before  the  courts  of  the  district,  by  which 
Houston  was  mulcted  in  the  sum  of  S500,  and  ordered  into  confinement  till  that 
sum  was  paid.  Thereupon  Jackson,  as  President,  instantly  interposed,  remitted 
the  fine,  and  ordered  Houston  to  be  released  from  custody !  t  And  this  was  the 
man  who,  Bancroft  says  in  his  eulogy,  "  was  imbued  with  all  the  great  ideas 
which  constitute  the  moral  force  of  the  country  "  ! 

So  far  from  coming  to  Washington,  as  Bancroft  alleges,  "for  the  purpose  of 
restoring  the  regulation  of  the  exchanges  to  the  rightful  depository  of  their 
power,  —  the  commerce  of  the  country,"  —  he  had  about  as  much  idea  of  this  as 
he  had  of  devoting  his  presidential  term  to  writing  a  treatise  upon  the  Talmud. 
Bancroft  applauded  Jackson  to  the  echo  for  his  attack  upon,  and  overthrow  of, 
the  United  States  Bank  ;  although,  only  a  short  time  after  the  war  upon  it  began, 
he  used  the  following  language  in  reference  to  it,  in  an  elaborate  article  upon 
Mr.  McDuffie's  report,  published  in  the  "North  American  Review,"  of  January, 
1831 : — 

"  The  course  pursued  by  the  United  States  Bank  since  its  incorporation, 
entitles  it  to  the  fairest  hearing.  Witli  some  exceptions  in  the  earlier  part  of  its 
career,  it  has  conducted  its  affairs  strictly  according  to  tlie  received  principles 
by  which  the  best  Banks  in  the  country  are  regulated.  It  lias  adopted  among 
its  officers  many  who  had  acquired  experience  and  established  a  reputation  in 
the  service  of  older  corporations.  It  has  been  supported  in  its  career  by  the 
basis  of  a  solid  capital ;  its  modes  of  doing  business  have  been  exact,  gentlemanly, 
and  accommodating;  it  has  not  perverted  its  excessive  and  almost  irresponsible 
powers  to  any  purpose  of  a  grasping  cupidity,  but  has  rather  used  them  with 
irreprehensible  moderation.  Towards  many  of  the  Banks  in  the  West,  it  has 
exhibited  a  fostering  kindness ;  and  although  it  has  ample  resources  to  crush 
any  inconsiderable  rival,  and  wreak  its  vengeance  on  a  feeble  enemy,  yet  it  has 
never,  as  far  as  orr  knowledge  extends,  attempted  to  subvert  the  credit,  or  even 
impair  the  rightful  action,  of  any  local  institution." 

*  Debates  in  Congress,  1831-32,  vol.  viii.  part  ii.  p.  2821. 

t  This  whole  affair  is  fully  fletaUed  in  Parton's  Life  of  Jackson,  vol.  iil.  p.  388  et  seq. 


INCOMPETENCY   OF    MR.    BEDDLE.  535 

holders  of  the  Bank  were  incorporated  by  the  State  of  Penn- 
sylvania, under  the  name  of  the  United  States  Bank  of 
Pennsylvania.  The  act  was  simply  a  continuation  of  the 
Bank  mider  a  State,  instead  of  a  National,  organization.  The 
new  Bank  suspended  specie  payment,  with  the  Xew  York 
Banks,  on  the  10th  of  May,  1837.  It  did  not  resume  with  the 
latter ;  alleging  as  a  reason  the  necessity  it  was  under  of  con- 
sulting the  interests  of  the  weaker  institutions  of  its  State. 
The  true  reason,  undoubtedl}',  was  its  own  financial  weakness. 
It  contracted  to  pay  the  State  85,775,000  for  its  charter.  This 
was  sufficient  evidence  of  the  incompetency  of  its  management 
at  the  time.  The  following  is  the  explanation  for  not  resum- 
ing with  the  New  York  Banks,  given  by  Mr.  Biddle,  its  Presi- 
dent, in  a  letter  to  John  Quincy  Adams,  under  date  of  April 
5,  1838 :  — 

"  The  credit  system  of  the  United  States  and  the  exclusively 
metallic  system  are  now  fairly  in  the  field,  face  to  face  with  each 
other.  One  or  other  must  fall.  There  can  be  no  other  issue.  It 
is  not  a  question  of  correcting  errors  or  reforming  abuses,  but  of 
absolute  destruction  ;  not  which  shall  conquer,  but  whicli  shall 
survive.  The  present  struggle,  too,  must  be  final.  If  the  Banks 
resume,  and  are  able  by  sacrificin2;  the  community  to  continue 
for  a  few  months,  it  will  be  conclusively  employed  at  the  next 
elections  to  show  that  the  schemes  of  the  Executive  are  not  as 
destructive  as  they  will  prove  hereafter.  But  if  they  resume, 
and  again  are  compelled  to  suspend,  the  Executive  will  rejoice 
at  this  new  triumph,  and  they  will  fall  in  the  midst  of  a  uni- 
versal outcry  against  their  weakness.  This  is  perfectly  under- 
stood ;  and  accordingly  all  the  influence  of  the  Executive  is  directed 
to  drive  the  Banks,  by  popular  outrage  and  clamor,  into  a  prema- 
ture resumption,  —  not  a  business  resumption,  general  and  perma- 
nent, but  a  political  and  forced  resumption,  which  may  place  them 
at  the  mercy  of  those  in  power.  They  who  have  special  charge  of 
these  interests  must  then  beware  of  being  decoyed  from  their 
present  position.  They  are  now  safe  and  strong,  and  they  should 
not  venture  beyond  their  intrenchments  while  the  enemy  is  in  the 
plain  before  them.  If  they  resume,  one  of  two  things  will  happen 
—  their  notes  will  not  be  received  by  the  government,  or  they  will 
be  received.  If  they  are  not  received,  the  government,  to  the 
extent  of  the  revenue,  will  force  the  holders  of  the  notes  to  draw 
specie  from  the  Banks,  to  be  deposited  with  the  collectors  of  the 
revenue.  For  the  diffei-ence  between  the  revenue  and  the  expenses, 
the  government  will  issue  treasury  notes  to  be  sold  for  bank-notes, 
and  converted  into  specie ;  and  as  the  disbursements  are  made 
at  points  on  the  frontiers  remote  from  the  places  of  collection,  it 
will  not  return  to  the  Banks  issuing  it  except  circuitously.     But  if 


536      CUKREXCY   AND   BANKING  IN  THE  UNITED   STATES. 

the  notes  are  received,  they  will  not  as  formerly  be  deposited  in 
Banks,  and  drawn  out  attain  so  as  to  enter  into  the  circulation,  leav- 
inc^  the  public  creditor  hts  choice  of  specie  or  notes,  but  they  will  be 
left  on  special  deposit  with  the  receivers.  When  warrants  are 
drawn  on  these  receivers,  they  will  call  on  the  Banks  for  specie  to 
pav  the  favored  public  creditor,  selecting  of  course  the  Bank  on 
whom  they  will  draw  according  to  its  servility  or  opposition  to  the 
Executive,  and  thus  placing  them  all  under  his  control.  Now, 
under  such  circumstances,  is  it  wise  for^the  Banks  to  disarm  them- 
selves in  the  presence  of  their  enemy  ?  "  * 

The  man  who  could  w^ite  such  stuff  as  this  had  wholly  lost 
his  senses,  if  he  ever  had  any.  If  the  Bank  had  been  as  strong 
as  it  should  have  been,  it  could  have  defied  the  hostility  of 
government  as  well  as  that  of  everybody  else.  All  that  gov- 
ernment could  do  would  be  to  compel  it  to  discharge  the 
obligations  of  which  it  became  possessed.  It  could  not  come 
into  possession  of  these  without  paying  the  full  equivalent 
therefor.  The  greater  their  value,  the  greater  the  price  to  be 
paid.  To  refuse  to  resume  for  the  reason  that  an  enemy  was 
lying  in  wait,  was  to  refuse  to  resume  from  an  inability  to 
meet  him.  Mr.  Biddle  was  never  a  strong  man.  He  made  a 
competent  President  until  the  breaking  out  of  his  quarrel  with 
General  Jackson.  The  Bank  was  then  in  an  eminently  sound 
and  healthy  condition.  But  for  this  quarrel,  there  is  no  reason 
why  it  should  not  have  remained  so.  In  ordinary  times,  great 
abilities  were  not  required  of  its  President.  The  quality 
chiefly  wanted  was  good  judgment  as  to  the  paper  offered  for 
discount.  Mr.  Biddle  could  not  have  propitiated  General  Jack- 
son without  a  loss  of  self-respect.  Had  he  yielded  to  his 
demands  in  one  instance,  he  would  have  been  compelled  to 
3deld  in  all ;  for  nothing  less  than  the  whole  patronage  of  the 
Bank  would  have  satisfied  the  President,  and  the  greedy  and 
remorseless  crew  that  followed  in  his  train.  The  reasons  of 
the  attack  were  so  groundless  and  absiu'd  that  Mr.  Biddle 
believed  himself  to  be  wholly  master  of  the  situation  ;  and  he 
was  by  no  means  indisposed  to  measure  swords  with  his  great 
antagonist.  The  airs  he  put  on  were  turned  most  effectively 
against  him.  An  elegant  and  unimpressive  man  was  opposed  to 
one  who  had  the  most  consummate  mastery  over  the  passions 
of  his  fellows.     It  was  a  pigmy  in  the  lists  against  a  giant. 

^  Financial  Register,  April  5,  1838. 


INCOMPETENCY   OF  'MR.   BIDDLE.  537 

The  result  was  that  Biddle  daily  grew  weaker,  while  his  an- 
tagonist grew  stronger.  There  was  one  way,  and  only  one,  in 
which  he  could  have  secured  the  victoiy :  and  that  was,  to  tell 
the  country  that  he  had  no  quarrel  in  hand  ;  tliat  he  should 
continue  the  discharge  of  his  duties  as  he  had  discharged  them  ; 
and  that,  if  the  people  did  not  want  the  Bank,  he  should  wind 
it  up  at  the  expiration  of  its  charter,  return  the  stockholders 
their  money,  and  await  the  wishes  of  the  country.  Instead  of 
taking  a  course  so  simple,  and  at  the  same  time  so  effective, 
he  descended  to  a  personal  controversy,  in  which  Jackson 
could  throw  more  and  dirtier  mud  in  an  hour  than  he  could 
throw  in  a  lifetime.  The  consequence  was,  that  he  was  speedily 
driven  from  the  field  with  a  soiled  reputation,  a  soured  temper, 
and  a  perverted  judgment.  He  was  determined  that  the  Bank 
should  not  be  put  down  :  so  he  took  a  charter  from  the  State 
of  Pennsylvania,  paying  therefor  a  sum  equalling  one-sixth  of 
its  capital,  when  he  should  not  have  paid  a  dollar.  If  the 
charter  had  cost  him  nothing,  he  would  have  made  a  failure 
in  accepting  it,  from  the  impossibility  of  finding  in  Philadel- 
phia, to  which  his  operations  were  chiefly  to  be  confined, 
adequate  employment  for  so  large  a  capital.  The  total  amount 
of  banking  capital  in  that  city  now  equals  only  $17,135,000,  — 
not  one-half  that  of  the  United  States  Bank.  As  an  inevitable 
result,  he  was  driven  into  speculations,  which  took  the  direction 
of  cotton.  The  market  went  heavily  against  him.  Suspend- 
ing in  1837,  the  losses  he  had  made  in  speculations,  including 
the  bonus  paid  the  State,  had  so  crippled  the  resources  of  the 
Bank  that  it  was  in  no  condition  to  resume,  which  it  under- 
took to  do  August  15,  1838.  This  attempt  at  resumption 
was  only  the  opportunity  of  its  creditors.  They  so  exhausted 
its  means  that  it  was  again  compelled  to  suspend  in  October 
of  the  following  year.  In  obedience  to  the  requirements  of 
the  legislature  of  Pennsylvania,  it  again  attempted  to  resume 
on  the  15th  of  January,  1841.  A  run  immediately  set  in  upon 
it ;  and,  after  losing  $6,000,000  of  specie,  it  again  suspended, 
and  finally,  on  the  4th  of  February,  1841.  It  was,  or  rather 
its  assignees  were,  able  to  take  in  its  notes  and  pay  off  its 
depositors.  Its  stock  was  wholly  lost.  It  by  no  means  fell 
alone.  Elliot,  in  his  "  Funding  System,"  gives  a  tabular  state- 
ment of  55  Banks,  having  an  aggregate  capital  of  |i67,036,265, 
and  a  note  circulation  of  i^23,577,752,  which  failed  the  same 


538      CURRENCY  AND   BANKING   IN   THE   UNITED   STATES. 

year,  whose  capitals  were  wholly  lost,  and  whose  notes  were 
in  great  measure  a  loss  to  their  holders. 

One  of  the  most  striking  illustrations  of  the  monetary  history 
of  the  time,  as  well  as  of  the  character  of  the  people  whom 
General  Jackson  led  so  gallantly  to  the  attack  of  the  United 
States  Bank,  is  that  afforded  by  the  State  of  Mississippi. 
That  young  but  ambitious  member  of  the  Confederacy,  aroused 
by  the  General's  attack,  thought  it  becoming  her  interest  and 
dignity  to  provide  a  system  of  her  own.  In  1830,  she  chartered 
the  Planters'  Bank  of  Mississippi ;  which,  however,  did  not  get 
into  operation  before  1832.  In  1833,  desirous  of  giving  the 
Bank  the  means  of  making  a  respectable  show  in  the  world, 
and  to  enable  it  to  aid  in  "  developing  the  resources  of  the 
State,"  she  issued  bonds  to  it  to  the  amount  of  $2,000,000, 
bearing  interest  at  the  rate  of  6  per  cent.  These  were  sold 
in  New  York  at  a  premium  of  13.25  per  cent ;  realizing  an 
advance  of  about  $250,000,  of  which  the  State  prudently 
invested  $212,740  in  the  Bank,  increasing  her  interest  in  it  to 
$2,212,740.  Great  success  appeared  to  attend  this  operation  ; 
for,  with  the  money  obtained  on  the  bonds,  the  Bank  was  for  a 
time  enabled  to  pay  the  interest  accruing  on  them  and  mag- 
nificent dividends.  On  the  1st  of  January,  1834,  its  paid-up 
capital  was  reported  to  be  $2,066,805  ;  of  which,  it  appears,  the 
public  held  $464,065.  Its  loans  and  discounts,  at  that  time, 
equalled  $5,461,464  ;  its  circulation,  $1,510,426  ;  its  deposits, 
$545,353  ;  its  specie,  $113,220.  Encouraged  by  all  this,  nine 
new  Banks  were  chartered  that  year,  which,  with  the  Planters' 
Bank,  reported  on  the  first  day  of  January,  1835,  a  paid-up 
capital  of  $5,890,162 ;  loans  and  discounts  to  the  amount  of 
$10,379,651;  circulation,  $2,418,475;  deposits,  $1,888,762; 
specie,  $359,302.  There  was  a  rapid  increase  in  the  number 
and  operations  of  the  Banks  until  1838,  when  the  State, 
unwilling  to  allow  the  people,  individually,  to  bear  off  all  the 
emoluments  and  honors,  again  entered  the  field,  and  chartered 
the  "  Union  Bank  of  Mississippi,"  with  a  capital  of  $15,500,000, 
subscribing  thereto  $5,000,000  ;  for  the  payment  of  which  she 
issued  her  bonds  for  a  like  amount,  bearing  interest  at  the  rate 
of  5  per  cent.  These  bonds  were  sold  in  Europe,  chiefly  in 
Holland,  through  the  agency  of  the  United  Statets  Bank,  by 
which  the  payment  of  the  interest  accruing  thereon  was  guar- 


HISTORY   OF  BANKING   IN   MISSISSIPPI. 


539 


anteecl.  The  bonds  realized  their  par  value,  wliich  was  paid 
over  to  the  Uniou  Bank,  bringing  into  the  State  a  sum  of 
money  of  which  the  like  was  never  before  heard  of.  The 
Genie  of  the  fable  was  again  let  loose.  All  the  Banks  of  the 
State  did  their  best  to  rival  the  young  giant  rising  in  their 
midst.  At  the  close  of  1839,  the  amount  of  paid-up  capital  of 
the  State,  including  that  of  the  Union  Bank,  was  reported  at 
$30,379,403 ;  the  loans  and  discounts,  at  848,333,728 ;  note 
circulation,  at  $15,171,639 ;  deposits,  at  88,691,601 ;  specie,  at 
$867,977.  The  free  white  population  of  the  State  at  that  time 
numbered  about  170,000.  The  paid-up  capital  per  head  of 
population  equalled  $180  ;  loans  and  discounts,  8285  ;  circula- 
tion, including  deposits,  $140.  Had  all  been  gold,  the  touch 
of  Midas  could  hardly  have  effected  more.^ 

While  all  were  gazing  in  silent  wonder  upon  this  meteor, 
which  swept  with  dazzling  brilliancy  across  the  horizon,  came 
a  sudden  crash,  and,  for  the  moment,  total  darkness.     A  few 


1  The  following  statement  will  show  the  extent  of  the  banking  operations  in 
this  State,  on  Jan.  1,  1840,  compared  with  those  of  the  States  of  New  York, 
Massachusetts,  and  Pennsylvania. 


States. 

Free 
Popurn 

c  5 

Z=5 

Share 
Capital. 

Loans  and 
Discounts. 

Note 
Circulati'n. 

Deposits. 

Specie. 

Mississippi 
New  York 
Massachusetts 
Pennsylvania 

170,000 

2,400.000 

730,000 

1,700,000 

26 

98 
117 

49 

§30,379,403 
37,101,460 
34,478,110 
23,750,338 

848.333,728 
79,313.188 
56.643,172 
44,601,930 

§15,171,639 
24,198.000 
10,892,249 
13,749,014 

S8,691,601 

30,883.179 

8,784.516 

12,902,250 

§367.977 
6,857,020 
1,455,230 
3,113,990 

The  amount  of  loans  and  discounts  of  the  Banks  of  Mississippi  equalled 
$285  per  head  of  free  population  ;  their  circulation,  including  deposits,  -Sl-iO  per 
head.  Those  of  the  Banks  of  the  State  of  New  York  equalled  $30  per  head ; 
their  circulation,  including  deposits,  equalled  •^23  per  head. 

The  following  statement  will  show  the  ninnber,  amount  of  paid-up  capital, 
loans  and  discounts,  note  circulation,  deposits  and  specie,  of  the  Banks  of  the 
State  of  Mississippi,  from  Jan.  1,  183-1,  to  Jan.  1,  1840,  inclusive  :  — 


Teaks. 

No.  of 
Banks, 

Share  Capital. 

Loans  and 
Discounts. 

Note 
Circulation. 

Deposits. 

Specie. 

1834 
1835 
1836 
1837 
1838 
1840 

1 
10 
13 
18 
26 
26 

§2,666,805 
5.890,162 
8.764,5.50 
12.872,815 
19.231,123 
30,379,403 

§5.461.464 
10,379.651 
19,124,977 
24,351,414 
28,999.984 
48,333,728 

SI, 510,426 
2,418,475 
4,490,.521 
5,073.425 
7,472.334 

15,171,639 

§545,353 
1,888.762 
6,401,518 
5.345.384 
4.638.669 
8,691,601 

§113,220 
359,302 
659,470 

1.369.457 
766.360 
867,977 

No  returns  for  1839  appear  to  have  been  made. 


540      CUEEEXCY   AND   BANKING    IN   THE   UNITED   STATES. 

fragments,  a  few  pieces  of  scoria  picked  up  here  and  there, 
were  all  that  remained.  The  nucleus  which  was  provided  by 
the  State  bonds  served  for  hardly  a  mouthful  for  the  rapacious 
and  barbarous  crew  by  which  it  was  seized.  That  which 
appeared  to  the  public  was  the  merest  shadow,  as  vapory  and 
unsubstantial  as  the  trail  of  a  comet.  The  -$.30,000,000  of 
reported  paid-up  capital  was,  with  the  exception  of  that  bor- 
rowed on  the  bonds  of  the  State,  paid  in  in  "  stock  notes," 
which  were  discounted  by  the  Banks,  —  the  proceeds  going  to 
pay  up  their  stock  subscriptions.  The  operation  was  simply  a 
change  in  the  form  of  the  credits  ;  so  that,  after  the  money  bor- 
rowed on  the  State  bonds  was  exhausted,  nothing  remained  but 
entries  upon  the  books  and  pajDers,  representing  indebtedness, 
from  which  hardly  a  dollar  was  ever  realized.  The  -$48, 000,000 
of  loans  were  never  paid ;  the  $23,000,000  of  notes  and  deposits 
never  redeemed.  The  whole  system  fell,  a  huge  and  shapeless 
wreck,  leaving  the  people  of  the  State  very  much  as  they  came 
into  the  world.  Their  condition  at  the  time  beggars  description. 
Society  was  broken  up  from  its  very  foundations.  Everybody 
was  in  debt,  without  any  possible  means  of  payment.  Lands 
became  worthless,  for  the  reason  that  no  one  had  any  money 
to  pay  for  them.  The  only  personal  property  left  was  slaves, 
to  save  which,  such  numbers  of  people  fled  with  them  from  the 
State,  that  the  common  return  upon  legal  processes  against 
debtors  was  in  the  very  abbreviated  form  of  "  G.  T.  T.," 
gone  to  Texas^  —  a  State  which  in  this  way  received  a  mighty 
accession  to  her  population. 

The  interest  of  the  bonds  issued  to  the  Planters'  Bank  was 
paid  by  it  up  to  1840.  That  of  those  issued  to  the  Union 
Bank  were  paid  by  that  institution,  or  by  the  United  States 
Bank,  by  which  their  payment  was  guaranteed,  up  to  and 
including  Nov.  1, 1840.  That  falling  due  on  May  1, 1841,  not 
being  paid  by  either  Bank,  Messrs.  Hope  &  Company,  of  Am- 
sterdam, as  agents  of  the  bondholders,  addressed,  on  the  22d  of 
May,  1841,  a  courteous  communication  to  the  Governor  of 
the  State ;  calling  the  delinquencies  to  his  attention,  and  re- 
spectfully urging  him  to  take  proper  action  in  the  premises. 
This  communication  received  from  him  a  prompt  and  charac- 
teristic reply ;  informing  Messrs.  Hope  &  Company  that  his 
State,  in  her  sovereign  capacity,  had  repudiated  payment  of 
her  bonds ! 


HISTORY   OF   BANKING   IX   MISSISSIPPI.  541 

The  bondholders  were  not  silenced  b}-  this  communication, 
for  the  reason  that  it  was  not  believed  that  the  action  of  the 
Governor  would  be  sanctioned  by  the  people.  To  get  rid  of 
their  importunities,  which  were  as  annojdng  as  they  were 
urgent,  the  legislature,  in  1841,  formally  took  up  the  matter, 
and  referred  it  to  a  Committee  of  its  own  body  ;  which  reported, 
on  the  10th  of  February,  1842,  the  payment  of  the  bonds  to  be 
incompatible  with  the  honor  and  dignity  of  the  State.  We 
have  room  here  to  give  only  the  last  paragraph  of  the  Com- 
mittee's report :  — 

"  The  Committee,  in  coming  to  the  foregoing  conclusion,  are 
aware  tliat  they  differ  from  many  worthy  men  in  opinion.  But 
they  cannot  beUeve  that  if  this  subject  be  examined  free  from  all 
party  influences,  and  determined  by  an  application  of  law  and 
morals  to  the  facts,  any  other  conclusions  can  be  arrived  at  than 
those  which  they  have  adopted.  Entertaining,  as  we  belieye,  mis- 
taken views  as  to  the  true  principles  of  this  government,  as  well 
as  of  the  facts  in  this  case,  men  have  taken  the  liberty  of  slander- 
ing the  State,  both  at  home  and  abroad,  on  account  of  the  stand 
she  has  taken.  It  was  so  at  the  memorable  era  when  our  fathers 
leagued  together  and  pledged  "  their  lives,  their  fortunes,  and  their 
sacred  honor  "  to  resist  an  unconstitutional  invasion  of  their  rights 
as  British  subjects.  They,  also,  were  slandered.  Every  opprobrious 
epithet  was  heaped  upon  them  that  the  ingenuity  or  malice  of  their 
enemies  could  invent.  Many  of  theiy-  fellow-citizens,  under  mis- 
taken views  of  the  principles  upon  which  they  acted,  denounced 
them  as  disorganizers,  agrarians,  and  rebels,  and  joined  their  enemies 
to  force  them  into  submission  to  an  unconstitutional  law.  The  result 
of  the  memorable  and  eventful  contest  that  ensued  is  now  known. 
The  decision  of  the  civibzed  world  has  been  had  as  to  the  correctness 
of  the  principles  and  conduct  of  that  much  abused  and  slandered,  but 
noble  race  of  men.  Through  scenes  of  toil  and  blood  they  maintained 
the  position  they  assumed,  and  have  transmitted  to  their  posterity 
their  principles,  together  with  the  rich  inheritance  of  liberty,  secured 
by  a  well-regulated  and  constitutional  government.  Their  names 
are  stamped  on  the  page  of  immortality,  and  their  memory  is  em- 
balmed in  the  hearts  and  affections  of  a  grateful  people  ;  and  distant 
generations  will  pronounce  with  exultation  the  names  of  Washington, 
Jefferson,  Madison,  Hancock,  Franklin,  and  a  host  of  worthies  who 
struggled  together  through  that  gloomy  period  in  our  history.  The 
people  of  Mississippi  have  taken  a  similar  stand.  They  are  not 
controlled  by  selfish  or  mercenary  motives.  The  low  and  grovelling 
consideration  of  dollars  and  cents  has  nothing  to  do  with  the  merits 
of  this  question.  Their  honest  obligations  they  will  fulfil,  should 
they  have  to  divest  themselves  of  the  comforts  and  necessaries  of 
life  to  do  so.  Higher  and  holier  motives  than  mere  pecuniary  ac- 
quisitions actuate  them.  They  have  determined  that  they  never 
will  submit  to  an  invasion  of  then-  Constitution  by  either  foreign  or 


542      CURRENCY  AND   BANKING   IN  THE   UNITED   STATES. 

domestic  foes.  The  ri^lits  securecl  to  them  under  that  sacred  instru- 
ment they  will  maintain  at  all  hazards  ;  and,  relying  on  the  cor- 
rectness of  their  principles  and  the  justness  of  their  cause,  they 
will  with  confidence  and  cheerfulness  submit  to  the  verdict  of  pos- 
terity." 

Glowing  as  was  the  eloquence  of  this  Report,  it  was  fairly 
eclipsed  in  a  speech  delivered  in  the  halls  of  Congress  by  Mis- 
sissippi's favorite  son,  Mr.  Jacob  Thompson,  then  a  member  of 
the  House,  —  a  man  whom  his  people'delighted  to  honor,  and 
who,  from  one  elevation  after  another,  became  under  Buchanan, 
as  Secretary  of  the  Interior,  one  of  his  cabinet,  and  serving 
during  his  whole  term,  and  till  the  outbreak  of  the  Rebellion, 
as  one  of  the  chief  administrators  of  the  affairs  of  the  nation. 
In  1842,  it  became  convenient  for  the  United  States  to  borrow 
a  few  millions.  The  question  was  as  to  the  mode.  In  the 
debate  which  took  place  in  the  House  upon  the  subject,  the 
firm  of  Prime,  Ward,  &  King,  of  New  York,  was  referred  to 
(Mr.  King,  one  of  its  members,  being  the  gentleman  whom 
General  Jackson  so  successfully  bullied  in  1833)  as  havdng 
expressed  opinions  unfavorable  to  the  negotiation  o^  a  loan  in 
Europe,  in  consequence  of  the  discredit  thrown  upon  American 
securities  by  the  action  of  the  State  of  Mississippi.  This  in- 
sinuation brought  her  gallant  son  to  his  feet.  He  gloried  in 
the  act  of  repudiation,  and  indignantly  hurled  back  upon  its 
authors  the  foul  stigma  sought  to  be  cast  upon  the  fair  fame 
of  his  State  :  — 

«  From  the  late  action  of  the  State  of  Mississippi,"  he  said,  "  I 
feel  a  renewed,  a  deeper  confidence  in  the  intelligence,  the  honor, 
the  firmness,  and  ])atriotism  of  that  people.  Frowned  upon  at 
home  by  those  who  denied  their  power  to  inquire  into  their  rights, 
denounced  and  misrepresented  by  their  enemies  from  abroad,  they 
have  gone  on  in  the  even  tenor  of  their  way,  seeking  truth  and 
asserting  right.  And  I  am  now  prepared  to  say  to  the  friends  of 
liberty,  of  "the  rights  of  freemen,  of  constitutional  government, 
everywhere,  Stand  firm  !  be  of  good  cheer  !  Here  is  a  people  who 
will  extend  to  you  sympathy  and  succor  and  effective  aid.  Doubt 
not  their  courage,  their  honor,  or  their  willingness.  Let  the  hour  and 
the  necessity  come,  and  Mississippi  will  go  forward,  and  take  as 
bold  a  stand  in  asserting  the  rights  of  mankind,  in  resisting 
oppression,  in  vindicating  the  integrity  of  constitutions,  as  any 
other  State  in  the  Union.  .  .  . 

"  Mississippi  has  passed  through  some  severe  trials.  "While 
the  credit  system  was  considered  a  blessing,  and  others  were 
sipping  of  its  delicious  and  intoxicating  poison,  she  slaked  her  thirst 


KEPUDiATiox  nsr  ivnssissippi.  543 

with  eager  haste,  and  drained  the  cnp  to  its  very  dregs.  Exhilara- 
tion followed  ;  for  the  hour  there  was  '  the  feast  of  reason  and  the 
flow  of  soul.'  The  hectic  flush  upon  her  cheek  was  mistaken  for 
the  rich  crimson  of  health  and  beauty.  The  life  currents  coursed 
rapidly  through  her  veins,  and  gave  a  charm  to  being,  which  cast  its 
rainbow  tints  on  all  surrounding  nature.  She  walked  in  grandeur, 
—  the  wonder,  the  admiration,  the  envy  of  all.  The  excitement 
grew  higher  and  higher.  Flattered  and  caressed  on  all  sides,  she 
was  deemed  the  fairest  of  the  fair,  the  loveliest  of  the  lovely,  the 
proudest  of  the  proud.  Wherever  her  citizens  travelled  abroad,  they 
were  the  'observed  of  all  observers.'  Each  one  was  considered 
a  hero  of  princely  fortune  and  princely  liberality.  The  dealer  in 
the  cities  hasted  to  make  his  acquaintance,  laughed  at  his  wit, 
aided  and  connived  at  him  in  his  prodigality  and  irregularity,  and 
quailed  at  his  fi'own.  But  the  fatal  hour  came,  —  foretold  and  fore- 
seen, indeed,  by  some  of  the  wise  and  considerate,  but  well-nigh 
forgotten  by  all  in  the  general  intoxication.  Her  overstrained 
nerves  gave  way,  and  prostration  ensued.  Then  were  seen  the 
awful  contortions  of  the  limbs  and  the  wild  flushings  of  the  eye, 
which  betokened  madness  and  presaged  death.  The  alarmed  execu- 
tive called  together  the  legislative  doctors,  and  bade  them  in  their 
wisdom  consult,  and  speedily  administer  the  healing  balm,  or  disso- 
lution was  inevitable.  They  did  consult,  and  they  determined  that, 
as  the  patient  was  sinking,  more  stimulant  must  be  procured  and 
speedily  applied.  The  Constitution,  the  bulwark  of  the  freedom  of  the 
citizen,  intended  to  guard  his  rights  in  this  hour  of  trial  and  tempta- 
tion, stood  in  the  Avay !  With  more  benevolence  than  wisdom,  they 
leaped  its  barriers,  and  drenched  the  sufferer  with  a  copious  draught 
of  the  noxious  poison.  The  disease  grew  worse,  the  pains  increased, 
and  the  m^  rithings  were  more  distressing.  At  last,  the  physician's 
skill  and  the  physician's  medicine  were  exhausted,  and  no  further 
reliance  was  placed  on  artificial  means.  The  patient  was  told  that 
she  must  trust  for  recovery  to  the  strength  and  vigor  of  her  consti- 
tution and  natural  resources.  From  that  hour  she  felt  more  calm 
and  easy,  and  recovery  commenced.  The  improvement  has  been 
slow,  but  progressive,  —  still  she  feels  debilitated  and  enfeebled  ;  but 
all  look  forward  to  an  early  and  complete  restoration.  The  only 
precaution  required  in  her  condition  is  a  total  abstinence  from  that 
intoxicating  poison  which  caused  her  disaster.  In  recurring  to  the 
past,  she  feels  mortified  and  chagrined  at  her  excesses;  and,  in 
returning  to  a  state  of  soundness,  her  first  and  highest  duty  is  to 
herself.  Restore  a  bleeding,  prostrate  Constitution,  which  has  been 
trampled  under  feet.     She  will 

"  '  To  her  own  self  be  true  ; 
And  it  will  follow,  as  the  night  the  day, 
She  cannot  then  be  false  to  any  man.' 

"  I  said  I  felt  prouder  of  Mississippi  this  day  than  I  ever  felt 
before.  I  have  seen  her  people  tried,  and  I  know  them.  Too 
proud  to  acknowledge  themselves  insolvent,  too  firm  and  too  proud 


544      CURRENCY  AND   BANKING   IN  THE   UNITED   STATES. 

to  submit  to  a  violation  of  their  rights,  regardless  of  the  strokes 
of  calumniators,  they  take  their  stand,  and  appeal,  as  our  ancestors 
did,  to  a  candid  world  and  an  impartial  posterity  for  support. 
Every  true-hearted  Mississippian  feels  proud  of  his  State.  She  has 
forty  thousand  freemen  who  are  ready  to  risk  all,  to  sacrifice 
every  thing,  for  her  honor  and  her  rights.  Warmed  by  a  Southern 
sun,  fanned  by  a  Southern  breeze,  fed  upon  a  generous  soil,  our 
hearts  are  entwined  around  our  noble  State,  and  we  '  grapple  her 
to  our  bosom  with  hooks  of  steel.'  We  love  Mississippi,  our  sov- 
ereign mistress,  to  whom  we  owe  fealty  and  obedience  ;  for  her  we 
would  live,  and  for  her  sake  we  would  not  refuse  to  die.  It  is 
praise  enough  to  satisfy  the  ambition  of  a  common  man,  tread 
where  he  mTiy,  to  feel  and  to  say,  'Mississippi  is  my  home.'" 

But  the  end  was  not  yet.  The  holders  of  the  bonds  issued 
to  the  Union  Bank,  by  dint  of  importunity  obtained  authority 
to  try  the  question  of  their  constitutionality  in  the  highest 
legal  tribunal  of  the  State.  This  court  affirmed  the  constitu- 
tionality of  the  Act  issuing  them,  and  that  they  were  binding 
obligations  on  the  State.  As  no  execution  could  issue  against 
her,  all  that  the  bondholders  took  by  their  proceedings  was  a 
bootless  decision  in  their  favor.  The  holders  of  the  bonds  issued 
by  the  Planter's  Bank,  the  constitutionality  of  the  issue  of 
which  was  never  questioned,  were  equally  persistent  in  their 
efforts  for  redress.  They  obtained  from  the  legislature  of  the 
State  so  late  as  1853,  twelve  years  after  default  in  payment  of 
interest,  an  Act  referring  the  question  of  their  payment  to  the 
people.  These  "  rose  in  their  majesty,"  to  quote  the  language 
which  reported  their  great  achievement,  and  voted  that  the 
bonds  should  not  be  paid !  Having  exhausted  all  remedies  open 
to  them  in  the  legislature  of  the  State,  as  well  as  in  the  courts 
of  conscience  and  law,  the  unlucky  holders  of  both  classes  of 
bonds,  seeing  nothing  in  store  for  them  but  continued  losses 
and  insults,  slowly  and  sullenly  retired  from  the  contest. 

As  all  the  States  chartered  Banks,  there  were  as  many  systems 
—  if  such  a  word  may  be  used  —  in  the  country  as  there  were 
States.  There  was,  however,  nothing  deserving  the  name,  with 
the  exception  of  that  of  the  Suffolk  Bank.  Charters  were  to  be 
had  in  nearly  all  the  States,  upon  the  application  of  proper  par- 
ties. In  most  of  them,  no  provision  was  made  for  the  security 
of  their  note-holders,  other  than  their  share  capital.  A  greater 
or  less  proportion  of  this  was  held  as  reserves,  according  to  the 

1  Cong.  Globe,  Appendix,  3d  sess.  27  Cong.,  p.  177. 


fl 


BANKING   SYSTEM   OF   THE    STATE   OF   NE"W   YORK.       545 

location  of  the  Bank,  and  the  kind  of  business  which  it  trans- 
acted. The  first  attempt  at  any  thing  like  a  system,  provided 
by  the  legislature  of  Massachusetts,  was  the  passage,  in  1829, 
of  a  law  which  provided  that  no  Bank  should  go  into  operation 
unless  50  per  cent  of  its  capital  were  paid  in  in  coin ;  and 
that  no  Bank  should  issue  notes  exceeding  in  amount  25  per 
cent  of  its  share  capital.  Its  liabilities  of  all  kinds,  excepting 
deposits,  were  not  to  exceed  twice  the  amount  of  its  capital. 
Such  provisions,  however,  amounted  to  little,  for  the  reason 
that,  a  considerable  portion  of  their  loans  being  in  the  form  of 
credits,  the  Banks  had  no  motive  to  issue  larger  amounts  of 
notes  than  their  capital.  As  no  provision  was  made  for  the 
amount  of  reserves  to  be  held,  the  coin  to  set  a  Bank  in  motion 
could  be  purchased,  and  sold  immediately  after  it  got  into 
operation.  The  guarantee  for  the  proper  management  of  the 
Banks  of  this  State,  as  well  as  the  New  England  States,  whose 
laws  were  largely  copied  from  those  of  the  former,  was  the 
(Suffolk  Bank)  sj'stem  of  redemption  which  has  already  been 
sufficiently  described.  This  system  provided  the  safest  and 
best  currency  of  the  kind  ever  issued. 

The  State  of  New  York,  from  time  to  time,  had  created 
Banks  by  special  charters.  These  were  established  almost 
wholly  in  New  York  City,  and  in  the  leading  towns  upon  the 
Hudson.  To  meet  the  necessity  for  new  Banks  in  the  interior, 
the  State,  in  1829,  established  what  was  called  the  "  safety- 
fund  sj'stem,"  which  authorized  to  the  Banks  created  under  it 
the  issue  of  notes  equalling  twice  the  amount  of  their  paid-up 
capital,  and  allowed  them  to  make  loans  to  twice  and  a  half  its 
amount.  As  security  for  the  holders  of  the  notes,  every  Bank 
which  was  to  be  organized  thereafter,  or  whose  charter  was  to 
be  extended  (a  large  number  expiring  in  1829),  was  required 
to  pay,  annually,  to  the  treasurer  of  the  State  a  sum  equal  to 
one-half  of  1  per  cent  upon  its  share  caf)ital,  —  these  payments 
to  continue  till  each  Bank  had  paid  a  sum  equalling  3  per  cent 
upon  its  share  capital ;  the  amounts  so  paid  to  be  held  as  a 
common  fund  for  the  discharge  of  notes  or  other  liabilities  of 
any  Bank  included  in  the  system.  If  this  fund,  from  any 
cause,  became  diminished,  it  was  to  be  made  good  in  manner 
already  described.  In  1841-42,  11  of  the  safety-fund  Banks 
failed  ;  making  a  loss  to  their  creditors  of  12,558,933.     The 

85 


646      CUEKENCY  AND   BANKING  IN   THE   UNITED   STATES. 

fund  at  this  time  equalled  only  $86,274.  The  whole  amount 
contributed  to  it  up  to  Sept.  30, 1848,  equalled  only  81,876,063. 
The  balance  of  the  loss  was  provided  for  by  the  State,  which 
was  to  be  reimbursed  by  further  additions  to  the  fund.  In 
1842,  the  Act  was  so  amended  that  the  fund  became  chargeable 
only  with  the  losses  to  the  public  on  the  note  circulation,  which 
greatly  reduced  the  present  or  prospective  charge  upon  it. 
In  1838,  this  State  established  what  was  called  the  "free- 
banking  system,"  by  wliich  banking  associations  could  be 
formed  without  application  to  the  legislature.  These  associations 
were  required  to  deposit  with  the  Comptroller  of  the  State 
stocks  of  the  United  States,  or  of  the  several  States,  which 
should  be  equivalent,  in  interest,  to  a  5  per  cent  stock;  or 
bonds  and  mortgages  upon  improved  real  estate  having  a  value 
of  twice  the  sum  secured,  equal  in  amount  to  their  note 
circulation.  Upon  such  deposit  the  Comptroller  was  to  issue  a 
corresponding  amount  of  notes.  This  was  nothing  less  than  a 
system  founded  upon  securities  or  real  property.  The  result 
was,  that  previous  to  1843,  29  of  these  Banks  failed,  having 
an  aggregate  circulation  of  $1,238,374.  The  nominal  value 
of  the  securities  deposited  for  their  circulation  amounted 
to  11,555,338.  They  produced,  on  thek  sale,  in  winding  up 
the  Banks,  only  $953,371,  —  a  sum  equalling  only  74  per  cent 
of  their  circulation.  The  law  was  thereupon  amended  so  as  to 
exclude  all  stocks  except  those  of  the  United  States  and  of  the 
State  of  New  York,  which  were  required  to  be  the  equivalent 
of  6  per  cent  stocks.  A  wiser  provision  had  been  adopted 
in  1840,  requiring  all  the  Banks  of  the  State  to  redeem  their 
notes,  either  in  New  York  City,  Albany,  or  Troy,  at  a  discount 
of  one-half  of  1  per  cent.  In  1851,  this  discount  was  reduced  to 
one-quarter  of  1  per  cent.  After  the  passage  of  the  Act  of  1851, 
two  of  the  principal  Banks  of  the  City  of  New  York  undertook 
to  establish  for  the  State  a  system  somewhat  similar  to  the 
Suffolk  Bank  system  of  New  England.  The  notes  of  such  of 
the  country  Banks  as  kept  deposits  with  them  were  returned, 
—  the  redeeming  Banks  dividing  the  discount  between  them- 
selves and  the  issuers.  This  system,  though  by  no  means 
perfect,  exerted  a  very  salutar}^  influence  by  forcing  constant 
redemption  of  issues,  and  in  keeping  the  currency  down  to 
the  necessities  and  wants  of  the  people.  After  1838,  no  more 
safety-fund    Banks   were   chartered,   and   that   system   went 


BANKING   SYSTEM   OF   THE   STATE   OF  OHIO.  547 

gradually  out  of  existence.  In  1846,  the  amended  constitu- 
tion of  the  State  took  away  from  the  legislature  "  all  power  to 
pass  any  Act  granting  any  special  charter  for  banking  pur- 
poses," and  provided  that  corporations  or  associations  might 
be  formed  for  such  purposes  under  general  laws.  The  amended 
constitution  also  provided,  that,  after  the  year  1850,  stock- 
holders of  Banks  should  be  liable  to  the  amount  of  their  shares 
for  all  debts  and  liabilities  of  every  kind ;  and  that,  in  case  of 
insolvency,  the  holders  of  notes  should  have  a  preference  in 
payment  over  all  other  creditors. 

The  State  of  Ohio  affords  another  pertinent  illustration  of 
the  system,  or  want  of  sj^stem,  which  has  prevailed  in  this 
country,  in  the  creation  and  management  of  Banks.  In  1808, 
she  chartered  a  Bank  at  Marietta,  with  a  capital  of  $500,000, 
and  another  at  Chillicothe,  with  a  capital  of  $100,000.  From 
1809  to  1816,  4  more  Banks  were  chartered.  In  1816,  6  Banks 
were  chartered,  having  an  aggregate  capital  of  $1,600,000. 
From  1811  to  1832,  11  Banks  were  chartered,  with  an  ag- 
gregate capital  of  $2,700,000.  In  1833,  the  Franklin  Bank  at 
Cincinnati,  with  a  capital  of  $1,000,000,  was  chartered ;  and 
in  1834,  the  Ohio  Life  and  Trust  Company,  with  a  capital  of 
$1,000,000.  Only  a  part  of  these  Banks  went  into  operation. 
There  does  not  appear  to  have  been  any  special  provision 
made  to  secure  their  circulation.  The  number  of  them  in  op- 
eration on  the  1st  of  January,  1835,  was  24.  Their  aggregate 
share  capital  equalled  $5,819,692  ;  their  circulation,  $5,221,520  ; 
their  deposits,  $2,090,065 ;  their  loans  and  discounts,  $9,751,973. 
From  this  time  they  increased  rapidly,  in  consequence  of 
the  mania  created  by  General  Jackson's  attack  upon  the 
United  States  Bank.  In  1837,  there  were  32  in  ojDcration 
having  a  share  capital  of  $9,247,296;  circulation,  $8,326,974; 
deposits,  $7,590,933  ;  loans  and  discounts,  $18,178,699.  They 
all  suspended  in  May,  1837.  The  system  had  so  little  real 
foundation  that  most  of  the  Banks  went  out  of  existence,  — 
the  number  in  1844,  the  year  after  the  Banks  of  the  country 
resumed,  being  only  8,  —  their  share  capital  being  reduced  to 
$2,167,628  ;  their  note  circulation,  to  $2,246,999  ;  their  depos- 
its, $505,430  ;  their  loans  and  discounts,  $2,968,441 !  The 
reduction  of  their  loans  and  discounts,  equalling  $15,210,258 
in  a  period  of  seven  years,  shows  the  enormous  inflation  under 


548      CURRENCY   AND   BANKING   IN  THE  UNITED   STATES. 

Jackson's  experiment,  and  the  tremendous  penalty  that  was 
paid,  in  the  almost  total  annihilation  of  the  proper  instruments 
of  distribution.  Ohio  recovered  but  little  till  after  1845,  when 
she  established  the  State  Bank,  with  a  capital  of  $6,150,000, 
with  authority  to  establish  63  branches,  —  the  whole  to  be 
managed  by  a  Board  of  Control  of  one  member  from  each 
branch.  The  capital  for  each  was  to  be  supplied  where  it 
was  established.  The  system  was  made  liable  for  the  losses 
of  all.  To  provide  therefor  each  branch  was  to  deposit  with 
the  Board  of  Control  a  sum  equalling  10  per  cent  of  the  notes 
issued  to  it,  in  stocks  of  the  State,  or  the  United  States ;  or 
bonds  and  mortgages  upon  productive  real  estate,  having  a 
value  of  twice  the  amount  secured  thereby,  and  payable  on 
demand  to  the  board.  In  case  of  failure,  the  stock  and  bonds 
of  the  insolvent  Bank  were  first  to  be  applied  to  the  discharge 
of  its  notes,  before  any  of"  the  fund  contributed  by  the  other 
Banks  could  be  called  upon.  The  capital  was  allotted  to 
various  parts  of  the  State,  which,  for  this  purpose,  was  divided 
into  twelve  districts.  The  five  Banks  previously  chartered, 
and  then  in  operation  in  this  State,  were  allowed  to  avail 
themselves  of  the  privileges  of  the  Act.  The  notes  for  circu- 
lation were  to  be  issued  by  the  Board  of  Control,  and  were 
limited  to  double  the  amount  of  capital  on  the  first  $100,000 ; 
to  one  and  one-half  the  amount  on  the  second  $100,000,  or 
any  part  thereof;  and  to  one  and  one-quarter  the  amount 
upon  the  third  $100,000,  or  any  part  thereof.  Of  these  Banks, 
36  were  in  operation  in  1856,  ha-^ang  a  capital  of  $4,034,524, 
and  a  circulation  of  $7,112,320.  At  that  time,  the  Ohio  Life 
and  Trust  Company  was  the  only  one  of  the  old  Banks  remain- 
ing in  operation.  The  Act  of  1845  also  authorized  the  forma- 
tion of  Banks  independent  of  the  State  Bank.  These,  however, 
were  to  secure  their  circulation  by  deposits  of  the  stock  of  the 
United  States  or  of  the  State.  Of  these  Banks,  9  were  in 
operation  in  1856,  —  having  a  capital  of  $587,500,  and  a  circu- 
lation of  $893,839. 

In  1851,  a  system  of  free  banking  was  authorized,  whose 
circulation  was  to  be  secured  by  a  pledge  of  the  United 
States,  or  Ohio  State  bonds.  Of  these,  10  were  in  opera- 
tion in  1856  ;  having  a  capital  of  $738,050,  and  a  circulation 
of  $769,397.  In  1852,  the  revised  Constitution  of  the  State 
provided  that  no  new  Banks  should  be  created  by  the  legisla- 


BANKING   SYSTEM  OF  THE   STATE  OF   INDIANA.         549 

ture,  unless  sanctioned  by  the  people  at  the  next  general 
election.  In  1854,  there  were  in  operation  in  Ohio,  four  dis- 
tinct classes  of  Banks  :  those  incorporated  prior  to  1845,  having 
a  capital  of  11,550,000 ;  the  State  Bank  and  its  branches,  hav- 
ing a  capital  of  -$4,100,000  ;  the  inileiJendent  Banks,  created 
under  the  safety-fund  system,  having  a  capital  of  $720,000 ; 
and  the  free  Banks,  created  under  the  Act  of  1851,  having  a 
capital  of  $695,000.  Most  of  the  Banks  organized  under  the 
Act  of  1851  were  gradually  driven  out  of  existence  by  exces- 
sive taxation.  In  1856,  the  Act  of  1845,  incorporating  the 
State  Bank  and  branches,  was  extended  to  May,  1877.  That 
Act  forbade  any  higher  rate  of  taxation  upon  banking  than 
upon  any  other  kind  of  capital. 

The  creation  of  the  State  Bank  and  its  branches  contributed 
greatly  to  restore  the  finances  of  the  State  and  the  people, 
although  all  safety-fund  systems  are  radically  vicious.  No 
Bank,  except,  perhaps,  a  National  Bank,  should  be  required  to 
hold  securities  against  its  circulation.  Whatever  means  Banks 
possess  over  and  above  that  provided  by  their  bills,  should 
always  be  in  the  form  of  coin,  or  the  equivalent  of  coin,  to  be 
held  as  reserves.  The  provision  for  the  retirement  of  the 
notes  and  credits  should  be  their  bills.  Where  other  provision 
is  made,  the  inference  is  unavoidable,  that  notes  may  be 
properly  issued  upon  it,  and  will  circulate  by  virtue  thereof,  — 
an  inference  fatal  to  all  sound  banking. 

In  contrast  with  the  safety-fund  system  of  Ohio,  and  in  fact 
with  all  systems  of  the  kind,  was  that  which,  for  a  long  time, 
prevailed  in  the  adjoining  State,  Indiana.  That  State,  in 
1834,  established  the  State  Bank  of  Indiana,  the  capital  of 
which  was  almost  wholly  borrowed  from  abroad,  chiefly  on 
the  bonds  of  the  State.  The  Bank,  starting  with  adequate 
means,  fortunately  fell  into  competent  and  upright  hands.  It 
enjoyed,  for  the  twenty  years  of  its  existence,  uninterrupted 
success.  It  did  not  even  suspend  specie  payments  in  the 
great  crisis  of  1837.  Owing  government,  as  one  of  the 
deposit  Banks,  at  the  time,  something  over  $1,000,000,  it 
promptly  paid  the  amount  in  coin.  During  the  whole  trying 
period  of  the  suspension,  which  in  the  West  lasted  several 
years,  with  a  capital  of  only  about  82,500,000,  it  usually  main- 
tained coin  reserves  equalUng  $1,000,000.     These,  for  several 


550      CURRENCY   AND    BANKING  IN  THE   UNITED    STATES. 

years  after  the  Bank  went  into  operation,  equalled  60  per 
cent  of  its  note  circulation.  It  was  for  a  long  time  a  bright 
spot  in  a  vast  desert  of  incompetency  and  ruin.  Had  it  been 
a  safety-fund  Bank,  with  its  means  locked  up  in  securities,  for 
the  alleged  protection  of  its  note  holders,  it  would  necessarily 
have  followed  in  the  wake  of  all  the  Western  systems,  and 
ended,  perhaps,  in  bankruptcy ;  involving  an  enormous  loss  to 
the  holders  of  its  notes,  even  if  they  had  been  finally  redeemed. 
As  it  was,  it  always  had  its  means  in  hand  for  any  emergency ; 
securing,  at  the  same  time,  the  confidence  of  the  public,  which 
prevented  any  runs  upon  it  for  coin.  The  management  of  this 
Bank  is  probably  the  best  subject  for  study  of  any  instance  of 
the  kind  in  the  country.  It  was  in  a  new  State,  in  which  a 
high  degree  of  mercantile  training  and  experience  is  not  to  be 
expected,  and  in  which  it  is  always  difficult  for  Banks  to  resist 
the  importunities  of  their  customers.  Conducting  its  operations 
on  strictly  business  principles,  discounting  no  paper  but  such 
as  represented  actual  transactions  in  merchandise,  it  supplied, 
during  the  whole  period  of  its  existence,  and  without  embar- 
rassment, a  currency  very  nearly  uniform  in  amount,  and 
always  of  the  value  of  coin.  In  the  great  contraction  which 
took  place  between  1837  and  1843,  the  loans  and  discounts  of 
the  Banks  of  Ohio  fell  off  from  $18,178,699  to  82,968,441  ; 
while  those  of  the  Banks  of  Indiana,  chiefly  of  the  State  Bank 
and  its  branches,  only  fell  off  from  $8,179,271  to  $2,677,530. 
In  the  same  period,  the  note  circulation  of  the  Ohio  Banks  fell 
off  from  $8,829,974  to  $1,911,988,  while  that  of  those  of  the 
State  of  Indiana  only  fell  off  from  $1,970,595  to  $1,828,871. 
The  operations  of  her  State  Bank  are  a  striking  illustration  of 
the  correctness  of  the  principles  laid  down  in  this  work,  and 
are  carefully  to  be  considered  in  the  provision  of  any  system 
for  the  country  in  the  future.  Its  charter  expired  in  1854.  It 
was  then  wound  up,  returning  to  the  shareholders  their  capital, 
with  a  very  large  addition  in  accumulated  profits.  A  new 
State  Bank  was  created  in  its  place,  with  a  capital  of  $6,000,000, 
with  the  right  to  establish  numerous  branches.  It  was 
managed  with  the  same  ability  as  was  the  old  Bank,  and  did 
not  suspend  specie  payments  in  1857,  as  the  old  one  did  not  in 
1837.  In  1862,  when  it  became  a  National  Bank,  its  capital 
equalled  $3,854,2-00 ;  its  circulation,  $5,559,467 ;  its  deposits, 
$1,723,624  ;  its  loans  and  discounts,  $4,007,990  ;    its  specie, 


WESTERN,  OR  "WILD  CAT,  BANKING   SYSTEM.  551 

$3,284,696.     It  was  then,  probably,  in  a  stronger  position  than 
an}^  other  Bank  in  the  country. 

There  is  another  side  to  the  picture  of  the  management  of 
Banks  in  this  State,  by  no  means  so  agreeable.'  In  1851,  the 
new  Constitution  forbade  the  creation  of  Banks  except  by 
general  laws.  In  1852,  an  Act  was  passed,  providing  for 
the  issue,  by  the  proper  authorities,  on  the  deposit  by  any 
banking  association  of  the  stock  of  the  United  States,  or  of  the 
several  States,  of  notes  for  circulation  equal  to  95  per  cent  of 
such  stocks,  which  were,  in  the  matter  of  interest,  to  be  made 
equal  to  6  per  cent  stocks.  The  law  did  not  require  either 
the  stockholders  or  boards  of  directors  to  reside  in  the  State. 
In  1854,  86  of  these  safety-fund  Banks  had  been  established. 
The  returns  from  67  of  them  for  that  year  showed  an  authorized 
capital  of  832,900,000,  and  a  note  circulation  of  87,425,000. 
In  1856,  there  were  94  of  these  Banks  nominally  in  existence, 
of  which  53  had  failed,  their  notes  selling  all  the  way  from  25 
to  75  per  cent  of  their  nominal  value.  By  these  failures,  the 
banking  capital  of  the  State  was  reduced  from  87,281,935,  in 
1855,  to  84,045,325,  in  1856  ;  the  note  circulation,  from 
88,165,856  to  84,516,422.  Little  was  left  but  the  State  Bank. 
The  whole  safety -fund  system  gradually  went  out  of  existence  ; 
not,  however,  until  the  people  had  suffered  enormous  embar- 
rassment and  loss  from  its  operation.  The  securities  deposited, 
were  those  of  States  which  were  in  default,  or  which  speedily 
were  to  make  default,  and  which  either  remained  for  a  long 
time  at  a  large  discount,  or  proved  wholly  valueless.  The 
manner  in  which  these  Banks  were  got  up  and  managed  is 
well  shown  by  the  following  extract  from  the  message  of  the 
Governor  to  the  legislature,  in  1853  :  — 

"  The  speculator  comes  to  Indianapolis  with  a  bundle  of  bank- 
notes in  one  hand  and  the  stock  in  the  other ;  in  twenty-four  hours 
he  is  on  the  way  to  some  distant  point  of  the  Union,  to  circulate 
what  he  denominates  a  legal  currency  authorized  by  the  legislature 
of  Indiana.  He  has  nominally  located  his  Bank  in  some  remote 
part  of  the  State,  difficult  of  access,  where  he  knows  no  banking 
facilities  are  required,  and  intends  that  his  notes  shall  go  into  the 
hands  of  persons  who  will  have  no  means  of  demanding  their  re- 
demption." 

The  State  of  Michigan  had  a  similar  system,  to  describe 
which  would  be  only  to  repeat  the  description  already  givien 


552      CURRENCY   AND   BANKING  IN   THE   UNITED    STATES. 

of  that  of  the  State  of  Indiana.  In  reference  to  this,  the 
Governor  of  that  State,  in  his  message  to  the  legislature  of 
1853,  says  :  — 

"  At  present  we  are  giving  charters  to  the  issues  of  Banks  about 
which  we  actually  know  nothing,  in  whose  management  we  have 
no  participation ;  and  are  thus  literally  paying  a  large  tribute  for 
what  generally  in  the  end  proves  to  be  a  great  curse." 

The  States  of  Illinois  and  Wisconsin,  and  in  fact  many 
others,  had  similar  systems,  followed  by  similar  results.  The 
country  was  for  several  years  deluged  with  safety-fund  money  ; 
which,  from  the  inflations  and  consequent  contractions  which 
were  caused,  exerted  a  most  potent  influence  in  bringing  about 
the  panic  in  1857,  and  the  general  suspension  of  the  Banks 
throughout  the  country. 

As  the  suspension  of  specie  payments  cut  the  government 
wholly  off  from  its  resources,  other  than  the  notes  and  credits 
of  the  deposit  Banks,  and  as  these  might  prove  to  be  in  a 
measure  valueless.  Congress  was  called  together,  with  all 
practicable  speed,  to  consider  the  situation  and  provide  for  the 
future.  An  issue  of  Treasirry  notes  was  ordered  to  be  made 
receivable  in  payment  of  the  revenues.  The  collectors  and 
receivers  were  directed  to  hold  their  collections  to  be  dra^vn 
against  directly  by  the  Treasury.  Drafts  upon  the  deposit 
Banks,  in  case  of  their  non-payment,  were  also  made  receivable 
in  the  payment  of  the  revenues.  This  provision  made  their 
negotiation,  at  a  very  small  discount,  comparatively  easy.  The 
whole  community  was  in  the  same  condition  ;  and  as  creditors 
were,  as  a  rule,  willing  to  accept  the  money  in  circulation, 
government  did  not  experience  any  considerable  difficulty 
from  the  suspension.  The  third  instalment  of  the  public 
moneys  to  be  deposited  with  the  States,  July  1,  1837,  was  paid 
in  the  notes  of  the  suspended  Banks.  As  soon  as  Con- 
gress assembled,  the  fourth  payment,  due  in  October,  was 
directed  to  be  withheld.  The  most  sinsjular  feature  of  this 
great  drama  or  farce  was  the  instantaneous  change  of  front 
by  the  government  the  moment  suspension  took  place.  For 
eight  long  years,  the  great  theme  which  had  engrossed  its 
attention  and  labors  was  the  "  reformation  of  the  currency," 
by  measures  which  called  into  existence  an  immense  number 


ESTABLISHMENT  OF  THE  INDEPENDENT  TKEASUKY.      553 

of  State  Banks,  to  be  used  by  adventurers  and  speculators  as 
the  instruments  of  flooding  the  countrj^  with  paper  money. 
Nearly  -^100,000,000  of  worthless  stuff  was  created  and  thrown 
upon  the  market  in  the  short  period  of  four  years.  No  sooner 
did  the  whole  fabric  tumble  to  the  ground,  than  those  who 
reared  it  discovered  tliat  the  only  money  known  to  the  Consti- 
tution was  gold  and  silver.  Thenceforth  the  operations  of  the 
government  must  be  wholly  severed  from  Banks  of  all  kinds. 
It  was  to  consider  its  own  interests,  leaving  the  people  to  take 
care  of  theirs  as  best  they  could.  The  paternal  character  which 
it  had  so  long  assumed  was  thrown  off  with  all  the  ease  of  a 
mask.  The  proposition  for  the  separation  of  the  government 
from  the  Banks,  again  brought  the  Southern  leaders,  whose 
fidelity  had  been  somewhat  shaken  by  the  quarrel  between 
Jackson  and  Calhoun,  into  full  accord  with  the  administration. 
The  new  attitude  assumed  in  reference  to  the  Banks  was  re- 
garded as  another  step  to  remove  it  still  further  from  all  con- 
sideration of  the  public  welfare.  In  1840,  the  Act  creating 
the  Independent  Treasury,  as  it  was  termed,  was  passed.  By 
this  Act,  all  the  revenues  of  the  government  were  to  be  col- 
lected into  the  Treasury  in  coin,  and  disbursed  from  it  in  coin. 
In  1842,  from  a  change  in  the  administration,  the  Act  of  1840 
was  repealed.  In  1846,  the  old  party  having  been  restored  to 
power,  the  Act  of  1840  was  re-established.  This  has  been  con- 
tinued till  the  present  time.  The  same  Congress  that  repealed, 
in  1842,  the  Act  creating  the  Independent  Treasury,  also 
passed  a  bill  for  the  creation  of  another —  a  third  Bank  of  the 
United  States.  This  bill  was  vetoed  by  Mr.  Tyler,  who 
succeeded  to  the  Presidency  upon  the  demise  of  General  Har- 
rison. The  new  President  belonged  to  the  most  rigid  school 
of  "  strict "  constructionists.  The  Act  establishing  the  Sub- 
treasury  possesses  an  additional  interest,  from  the  relation  it 
bears  to  the  present  financial  condition  of  the  country.  As 
Mr.  Chase  found  it  in  operation  when  he  became  Secretary  of 
the  Treasury  under  Mr.  Lincoln,  he,  from  a  singular  perversity 
of  temper  or  judgment,  continued  it  in  operation,  although 
especially  authorized  to  dispense  with  its  provisions.  By  at-' 
tempting  to  carry  on  the  enormous  expenditures  of  the  War  of 
the  Rebellion  by  means  of  specie  alone,  he  speedily  compelled 
the  Banks  that  were  to  furnish  it  to  suspend  payment ;  leaving 
government,  as  he  contended,  no  other  alternative  than  the 
issue  of  its  notes.     By  this  act,  an  irredeemable  currency  be- 


554      CURRENCY  AND   BANKING  IN  THE   UNITED   STATES. 

came   a  permanent  feature   in   the  monetary  system  of  the 
country. 

As  already  seen,  the  greatest  depreciation  in  the  operations 
of  the  Banks  was  not  reached  until  1843.  They  could  re- 
sume only  by  an  unprecedented  reduction  of  these  liabilities. 
From  that  year,  a  rapid  improvement  took  place.  By  the  first 
of  January,  1847,  their  loans  and  discounts  had  reached 
$310,282,945 ;  an  increase  of  $55,738,008,  in  a  period  of  four 
years.  Their  note  circulation  increased  to  1105,519,766  ;  an 
increase  of  $46,956,158.  Their  deposits  reached  $91,797,533  ; 
an  increase  of  $35,628,905 :  the  aggregate  increase  of  both 
kinds  of  circulation  equalling  $82,585,063.  The  most  favorable 
feature  of  this  exhibit  was  a  reduction  of  the  share  capital  of 
the  Banks  from  $228,861,948  to  8203,070,622  ;  showing,  after 
resumption,  a  constant  weeding  out  of  weak  institutions.  The 
nominal  banking  capital  of  the  country  was  in  fact  less  in  1851 
than  in  1843  :  although  within  the  eight  years  the  circulation 
of  the  Banks  rose  from  $58,563,608  to  $155,165,251 ;  their 
deposits,  from  $56,168,628  to  $128,957,712;  the  aggregate 
increase  of  the  two  equalling  $169,390,726.  Their  loans  and 
discounts  in  the  same  period  arose  from  $254,444,937  to 
$413,756,799.  The  money  market  is  alwaj-s  in  the  soundest 
state  when  the  increase  of  currency  is  supplied  by  Banks  in 
existence,  —  by  institutions  possessed  of  capital,  training,  and 
experience,  which  increase  their  loans  to  meet  the  increasing 
wants  of  commerce,  and  increase  their  reserves  as  they  in- 
crease their  loans.  Their  conduct  for  the  present  is  governed 
by  the  precedents  of  the  past.  The  increase  of  their  operations 
is  perfectly  natural,  and  for  this  reason  excites  no  attention. 
Their  operations  are  most  carefully  directed,  as  they  are  more 
solicitous  about  the  preservation  of  their  capital  than  about  their 
dividends.  A  rapid  increase  in  the  number  of  Banks  is  always 
to  be  regarded  as  a  signal  of  danger  ;  as  a  part  of  them  will 
always  be  got  up  for  the  purpose  of  imposing  a  worthless  cur- 
rency upon  the  public,  while  another  part,  though  managed  with 
integrity,  are  liable  for  a  time  to  be  managed  improvidently. 

The  year  1847,  from  the  potato  blight  in  Ireland  and  the 
failure  of  crops  in  England,  brought  unprecedented  amounts 
of  specie  into  the  country,  and  gave  a  great  impulse  to  its 
affairs.  The  people  were  then  just  entering  upon  tlie  con- 
struction of  railways,  which  now  cover  the  whole  country  like 


PEOGKESS   OF   BANKING  IN   THE   UNITED   STATES.       555 

a  net-work,  and  which,  while  absorbing  vast  amounts  of  capital, 
contributed  enormously  to  its  wealth.  In  1848  came  the  great 
discoveries  in  California,  which  at  once  placed  this  country  in 
the  first  rank  among  the  gold-producing  nations  of  the  world. 
In  1854,  the  banking  movement  received  an  extraordinary 
impulse,  458  new  Banks  having  been  created  that  year,  the 
increase  of  their  share  capital  equalling  $93,467,552 ;  that  of 
their  circulation,  $58,616,427  ;  of  their  deposits,  $42,634,868  ; 
of  their  loans  and  discounts,  $148,454,021.  This  upward 
movement  was  followed  by  a  considerable  reduction  in  the 
circulation  the  following  year.  The  check,  however,  was  only 
temporary.  On  the  first  day  of  January,  1857,  the  note  circu- 
lation of  the  Banks  reached  the  enormous  sum  of  $214,778,822 ; 
their  deposits,  $230,351,312.  The  inflation  was  excessive ; 
and  the  Banks,  by  the  necessary  recoil,  were  compelled,  on 
the  13th  of  October  of  that  year,  to  suspend  specie  payments. 
Various  expedients  were  resorted  to,  to  alleviate  the  pressure. 
The  legislature  of  the  State  of  Pennsylvania  authorized  her 
Banks  to  continue  in  suspension  till  the  following  May.  The 
Secretary  of  the  United  States  Treasury  ordered  the  purchase 
of  considerable  amounts  of  bonds,  in  order  to  throw  money 
into  circulation.  The  legislature  of  the  State  of  New  York 
refused  to  grant  any  indulgence  to  her  Banks.  The  judges  of 
her  Supreme  Court,  however,  upon  consultation,  decided  that 
thev  would  not  issue  injunctions  against  any  Bank  in  default, 
except  at  the  suggestion  of  insolvency  or  fraud.  The  means 
of  the  Banks  of  New  York  City  were  so  little  impaired,  that 
they  resumed  specie  payments  on  the  14th  of  December  of  the 
same  year.  Their  notes  upon  the  day  following  the  suspen- 
sion were  at  hardly  any  discount.  No  difficulty  was  found 
in  obtaining  all  the  gold  that  was  wanted.  The  New  Eng- 
land Banks  resumed  simultaneously  wdth  those  of  New  York 
City.  Those  of  the  rest  of  the  country  followed  as  they  could 
provide  the  means.  Resumption,  however,  was  not  accom- 
plished without  an  enormous  reduction  in  the  liabilities  of  the 
Banks.  Their  note  circulation,  on  the  firsts  day  of  January, 
1858,  equalled  only  $155,208,344,  against  $214,778,822,  on  the 
first  day  of  January  of  the  preceding  year.  Their  deposits  fell 
off  to  $185,932,049,  against  $230,351,312.  The  aggregate  re- 
duction in  their  circulation  and  deposits  during  the  year  equalled 
$103,987,741 ;  the  reduction  being  nearly  twenty-five  per  cent. 
Their  great  strength,  however,  was  shown  by  the  rapidity  with 


556      CURRENCY   AND   BANKING   IN   THE  UNITED   STATES. 

which  they  recovered  their  position ;  the  aggregate  of  their 
notes  and  deposits  for  1859  equalling  8452,875,196,  against 
an  aggregate  of  1445,130,134  in  1857.  In  1860,  their  notes 
and  deposits  equalled  $460,904,606.  This  was  the  highest 
point  which  had  been  reached.  In  November  of  that  year 
occurred  the  election  of  Mr.  Lincoln  to  the  Presidency ;  an 
event  which  was  the  first  substantial  triumph  in  the  country  of 
Northern  over  Southern  ideas  as  to  the  nature  of  our  govern- 
ment, since  the  administration  of  Wasliington.  His  accession 
to  the  Presidency  was  the  signal  for  the  immediate  outbreak 
of  the  civil  war.  The  new  administration  succeeded  to  one 
which  was  itself  in  virtual  conspiracy  against  the  life  of  the 
nation.  It  found  the  Treasury  empty,  and  the  Army  deeply 
tainted  with  seditious  sentiments.  The  Navy,  representing 
the  commercial  spirit  of  the  North,  was  almost  unanimous  on 
the  side  of  freedom.  One  of  the  last  acts  of  the  previous 
Congress,  it  having  been  purged  by  the  secession  of  most  of 
the  Southern  members,  was  to  authorize  a  loan  of  $10,000,000. 
This  sum  sufficed  for  the  immediate  necessities  of  the  new 
administration.  The  new  Congress,  which  had  been  elected 
at  the  same  time  with  the  President,  was  speedily  called  to- 
gether ;  and,  on  the  17th  of  July,  authorized  the  negotiation 
of  large  loans.  In  the  mean  time  the  disastrous  battle  of  Bull 
Run  had  taken  place,  causing  great  depression  at  the  North, 
which  made  it  evident  that  the  only  mode  in  which  loans 
could  be  negotiated  was  for  the  Banks  of  the  country  to  com- 
bine by  their  advances,  to  relieve  the  pressing  necessities  of  the 
administration  ;  and  by  their  example,  to  inspire  public  con- 
fidence to  a  degree  that  would  render  possible  the  negotiation 
of  the  government  loans.  The  manner  in  which  the  Banks 
combined,  and  the  success  achieved,  are  fully  set  out  in  the 
following  extracts  from  a  statement  prepared  by  one  largely 
instrumental  in  promoting  their  union  for  the  purposes 
described :  — 

"  After  the  disastrous  battle  of  Bull  Run,  and  when  Washington 
was  closely  beleaguered  and  the  avenue  thence  to  New  York 
through  Baltimore  Avas  intercepted  by  the  enemy,  Mr.  Cliase,  then 
Secretary  of  the  Treasury,  came  to  this  city  via  AnnapoHs,  and 
immediately  invited  all  persons  in  this  community  who  were  sup- 
posed to  possess  or  to  control  cajutal  to  meet  him  on  the  evening 
of  August  9th,  at  the  house  of  John  J.  Cisco,  Esq.,  then  Assistant 
Treasurer  of  the  United  States  in  New  York.  This  invitation 
drew  together  a  large  number  of  gentlemen  of  various  occupations 


THE  BANKS  UNITE  TO  SUSTAIN  THE  GOVERNMENT.      557 

and  circumstances.  During  the  discussion  which  ensued^,  I  sug- 
gested the  practicability  of  uniting  the  Banks  of  the  North  by- 
some  organization  that  would  combine  them  into  an  efficient  and 
inseparable  body,  for  the  purpose  of  advancing  the  capital  of  the 
country  upon  government  bonds  in  large  amounts  ;  and,  through 
their  clearing-house  facilities  and  other  well-known  expedients,  to 
distribute  them  in  smaller  sums  among  the  people  in  a  manner  that 
would  secure  active  co-operation  among  the  members  in  this  special 
work,  while  in  all  other  respects  each  Bank  could  pursue  its  inde- 
pendent business.  This  suggestion  met  the  hearty  approbation  of 
the  assembled  company,  and  arrested  the  earnest  attention  of  the 
Secretary.  At  his  request,  it  was  presented  to  the  consideration 
of  the  Banks,  at  a  meeting  called  for  that  purpose  at  ihe  American 
Exchange  Bank  on  the  following  day ;  and  was  so  far  entertained 
as  to  secure  the  appointment  of  a  Committee  of  ten  bank  officers, 
to  give  it  form  and  coherence.  The  Committee  convened  at  the 
Bank  of  Commerce,  whose  officers  zealously  united  in  the  effort, 
and  a  plan  was  reported  unanimously.  Their  report  was  cordially 
accepted  and  adopted  by  the  Banks  in  New  York;  those  in  Boston 
and  Philadelphia  being  represented  at  the  meeting,  and  as  zealously 
and  cordially  united  in  the  organization.  ... 

"  It  Avas  at  once  unanimously  agreed  that  the  Associated  Banks 
of  the  three  cities  would  take  fifty  millions  of  7  3  10  notes  at  par, 
with  the  privilege  of  an  additional  fifty  millions  in  sixty  days,  and 
a  further  amount  of  fifty  millions  in  sixty  days  more,  making  one 
hundred  and  fifty  millions  in  all,  and  offer  them  for  sale  to  the 
people  of  the  country  at  the  same  price,  without  change.  In  this 
great  undertaking,  the  Banks  of  New  York  assumed  more  than 
their  relative  proportion.  To  insure  full  co-operation  and  success, 
the  expedient  of  issuing  clearing-house  certificates,  and  of  appropri- 
ating and  averaging  all  the  coin  in  the  various  Banks  as  a  common 
fund,  which  had  been  invented  but  the  year  before,  was  applied 
to  this  special  object  with  good  effect.  ... 

"  The  capitals  of  the  Banks  thus  associated  made  an  aggregate  of 
one  hundred  and  twenty  millions,  —  an  amount  greater  than  the 
Bank  of  Enoland  and  the  Bank  of  France  combined,  each  of 
which  institutions  had  been  found  sufficient  for  the  gigantic  strug- 
gles of  those  great  nations,  from  time  to  time,  in  conflict  with  all 
Europe.  ...  • 

"  The  following  figures  also  show  that  the  financial  condition  of 
the  Banks  at  the  time  was  one  of  great  strength  :  — 

LiabiUties.  Assets  in 

Deposits.  Circulation.  Coin. 

Banks  in  New  York    .     .     .  $92,046,.%8     .     .     .  $8,521,426    .     .     .  $49,733,990 

Boston     ....     18,235,061     .     .     .     6,366,466     .     .     .      6,66o,929 

",        Pliiladelphia     .     .     15,335,838    .     .     ■    2,076,857     .     .     •      6,765,120 

$125,617,207  $16,964,749  ^ 

125,617,207 

Total $142,581,956,  against  $63,165,039 

coin  on  hand,  equal  to  45  per  cent  of  all  liabilities.     Surely,  such 
conditions  as  these,  with  judicious  administration,  were  adequate 


558       CUREEXCY  AND    BA^^ING    IN   THE   UNITED   STATES. 

to  the  work  which  the  country  required.  A  great  merit  of  this 
bank  combination  at  that  critical  moment,  when  the  lite  ot  the 
nation  hung  in  the  balance,  consisted  in  the  fact  that  it  fully  com- 
mitted the  hitherto  hesitating  moneyed  capital  of  the  North  and 
East  to  the  support  of  the  government.  The  bank  officers  and 
directors  who  thus  counselled  and  consented  were  deeply  sensi- 
ble of  the  momentous  responsibility  which  they  assumed  ;  but  all 
doubt  and  hesitation  were  instantly  removed,  and  perfect  unanira- 
ity  was  secured  by  the  question,  '  W/tat  if  loe  do  not  unite  f 
4nd  actino-  as  guardians  of  a  great  trust  exposed  to  imminent 
danger,  they  fearlessly  elected  the  alternative  best  calculated  to 

"  The  problem  to  be  practically  resolved  by  the  Banks  was  this : 
How  can  the  available  capital  be  best   drawn   from  the  people, 
and  devoted  to  the  support  of  government,  with  the  least  disturb- 
ance to  the  country?  and  by  what  means  can  arms,  clothing,  and 
subsistence  for  the  army  be  best  secured  in  exchange  for  govern- 
ment credit  ?     These  were  simple  questions  of  domestic  exchange, 
and  most  naturally  suggested  the  use  of  the  ordinary  methods  of 
bank-checks,  deposits,  and   transfers,  that    the  experience  of  all 
civilized  nations  had  found  most  efficient  for  the  purpose  ;  and  that 
this  should  be  accomplished  by  the  Associated  Banks,  in  a  manner 
best  calculated  to  prolong  their  useful  agency  and  to  preserve  the 
specie  standard,  it  was  indispensable  that  their  coin  reserves  remain 
with  the  least  possible  change.     Accordingly,  it  was  at  once  pro- 
posed to  the   Secretary  that  "he  should  suspend  the  operations  of 
the  Sub-Treasury  Act  'in  respect  to  these  transactions,  and,  follow- 
ing the  course  of  commercial  business,  that  he  should  draw  checks 
upon  some  one  Bank  in  each  city  representing  the  Association,  in 
small  sums  as  required,  in  disbursing  the  money  thus  advanced. 
By  this  means  his  checks  would  serve  the  purpose  of  a  circulat- 
ing medium,  continually  redeemed,  and  the  exchanges  of  capital 
and  industry  woul.l  be  best  promoted.     This  was  the  more  impor- 
tant in  a  period  of  public  agitation,  when  the  disbursement  of  these 
large  suras  exclusively  in  coin  rendered  the  reserves  of  tlie  Banks 
all  the  more  liable  to  be  wasted  by  hoarding.     To  the  astonish- 
ment of  the  Committee,  Mr.  Chase  refused  ;  notwithstanding  the 
Act  of  Congress  of  August  5th,  which  it  seemed  to  us  was  passed 
for  the  very  object  then  ])resented,  but  which  he  declared  upon  his 
authority  as  finance  minister,  and  from  his  personal  knowledge  of 
its  purpose,  had  no  such  meaning  or  intent.     This  issue  Avas  dis- 
cussed from  time  to  time  with  much  zeal ;  but  always  with  the 
same  result.     It  was  seen  by  the  most  experienced  bank  officers 
to  be  vital  to  the  success  of  their  undertaking.     To  draw  from 
the  Banks  in  coin  the  large  sums  involved  in  these  loans,  and  to 
transfer  them  to  the  Treasury,  thence  to  be  widely  scattered  over 
the  country  at  a  moment  when  war  had  excited  fear  and  distrust, 
was  to  be  pulling  out  continually  the  foundations  upon  which  the 
whole  structure  rested.     And  inasmuch  as  this  money  was  loaned 
to  the  government,  and  was  in  no  sense  a  trust  reposed  in  the 
Banks,  there  appeared   to  them  no  reason  why  it  should  not  be 
drawn  by  checks  in  favor  of  government  contractors  and  creditors, 


THE   BANKS    UXITE  TO  SUSTAIN   THE  GOVERNMENT.      559 

who  would  require  to  exchange  them  for  other  vahies  in  commerce 
and  trade,  through  the  process  of  the  clearing-house.  And  this 
consideration  was  greatly  strengthened  by  the  fact,  that  these  ad- 
vances were  made,  and  the  money  publicly  disbursed,  a  lon^  time 
before  the  treasury  notes  were  ready  for  delivery  to  the  Banks 
which  had  paid  for  them.  In  the  light  which  has  since  been  shed 
upon  the  Act  of  Congress  referred  "to,  it  is  evident  that  undue 
weight  was  given  to  the  views  of  the  Secretary,  and  that  the  Banks 
would  have  conferred  an  incalculable  benefit  upon  the  country, 
had  they  adhered  inflexibly  to  their  own  opinions.  ...  It  soon  be- 
came manifest  that,  in  consenting  to  have  their  hands  tied  and  their 
most  efficient  powers  restricted,  while  engaged  in  these  great  op- 
erations, and  in  allowing  their  coin  reserves  to  be  wasted  by  pour- 
ing them  out  upon  the  community  in  a  manner  so  unnecessary  and 
exceptional,  the  Banks  deprived  themselves  and  the  government  of 
the  ability  of  long  continuing,  as  they  otherwise  coutd  have  done, 
to  negotiate  the  National  loans  upon  a  specie  standard. 

"  This  first  great  error,  if  it  did  not  create  a  necessity  for  the 
legal-tender  notes,  it  certainly  precipitated  the  adoption  of  that 
most  unhappy  expedient,  and  thereby  committed  the  nation  at  an 
earlier  day  to  the  most  expensive  of  all  methods  of  financiering. 

"One  other  subject  of  discussion  between  the  Secretary  and  the 
Associated  Banks  at  the  same  time  arose,  which  led  in  the  same 
direction.     Congress  by  its  Act  of  17th  July  had  authorized  loans 
to  the  amount  of  two  hundred  and  fifty  millions.     This  could  be 
issued  either  in  bonds  running  twenty  years  at  not  over  seven  per 
cent  interest  —  7-30  notes  running  three  years,  or  fifty  millions  of 
the  amount  could,  at  the  discretion  of  the  Secretary,'  be  made  in 
currency   notes    payable    on    demand    without    interest.     As    the 
undertaking  of   the  Associated  Banks  covered  one   hundred  and 
fifty  millions  of  this  sum,  and  it  was  desired  that  they  continue 
the  work  thus  auspiciously  begun,  a  question  of  the  expediency  of 
putting  out  the  circulating  notes  was  immediately  raised  by  one 
of  its  members.     A  very  small  amount  had   been  emitted.  "  The 
Treasury  was  empty  of  coin  to  redeem  them,  and  could  only  be 
replenished  by  the  proceeds  of  the  bank  loans.     It  was  evident  to 
the  bank  officers  that  they  could  not  sustain  coin  payments,  if  the 
transfers  from  their  vaults  to  that  of  the  Treasury  were  subject  to 
be  intercepted  and  absorbed  by  these  notes  of  government.     Nor 
could    the  Banks  receive  them  upon  deposit  from  the  public  as 
money,  while  they  were   responding   to  the  government  and  to 
their  own  dealers  in  coin.     It  was  an  inflation  of  the  currency  in 
the  form  most  embarrassing  to  the  enterprise  they  had  commenced. 
Accordingly,  the  Secretary  was  ui-geutly  solicited  to  refrain  from 
exercising   the   discretionary   powers   given  him  of   creating   the 
Treasury  currency,  until  all  other  means  were  exhausted.     In  re- 
sponse to  a  resolution  to  that  effect,  the  Secretary  assured  the  bank 
officers  of  his  acquiescence  in  their  suggestion  ;   but  at  the  same 
time  insisted  that  it  was  improper  for  a  public  officer  to  openly 
pledge   himself   not   to   exercise  a  power   conferred  by  the   law. 
With  this  understanding  the  Banks  began  their  woi-k ;  paying  into 


560      CURRENCY   Am)   BANKING   IN   THE   UNITED   STATES. 

the  Treasury,  in  coin,  one  hundred  and  fifty  millions,  in  sums  at 
the  rate  of  about  five  millions,  at  intervals  of  six  days.  Even  with 
all  these  unfavorable  circumstances  surrounding  them,  it  was  an 
encouracrina  fact,  observed  by  those  who  were  anxiously  watching 
the  practical  operation  of  this  great  and  novel  experiment  that, 
while  the  circulating  notes  in  the  country  were  restricted,  the  dis- 
bursements of  the  government  for  the  war  were  so  rapid,  and  the 
consequent  internal  trade  movement  was  so  intense,  that  the  coin 
paid  out  upon  each  instalment  of  the  loan  came  back  to  the  banks, 
through  the  community,  in  about  one  week;  the  natural  effect 
of  this  general  commercial  activity  upon  the  circulating  medium 
being  simply  to  quicken  its  flow. 

"  After  takino-  the  third  amount  of  fifty  millions  by  the  Associated 
Banks,  those  in'  New  York,  who  had  at  that  time  paid  in  of  their 
proportion  over  eighty  millions  in  all,  found  themselves  in  this 
position :  — 

Their  aggregate  coin,  which  on  the  17th  August,  before  the 

first  payment  into  the  Treasury,  was *,o'oiu  ^in 

Was  in  December  7th ^^''^I'^'Q^Q 

A  reduction  of  only $7,415,380 

and  the  other  two  cities  in  like  proportion. 

"  In  the  mean  time  the  7-30  notes  taken  by  the  Banks  had  been 
purchased  by  the  people  to  the  extent  of  some  fifty  millions,  not- 
withstanding a  prolonged  and  vexatious  delay  in  issuing  them  by 
the  Treasury  Department.  The  popular  feeling  was  all  that  could 
have  been  desired  for  continuing  that  method  of  distribution.  It 
may  be  confidently  affirmed,  that,  had  the  Banks  been  permitted  to 
exercise  their  own  methods  of  exchanging  the  bonds  for  the  varied 
products  of  industry  required  by  the  government,  they  could  have 
continued  their  advances  in  suras  of  fifty  millions  for  an  indefinite 
period,  and  until  the  available  resources  of  the  people  had  been  all 
gathered  in.  It  is  to  be  borne  in  mind  that  these  resources  were 
all  existing  at  home,  and  that  the  increased  industry  which  the 
war  excited  was  daily  increasing  new  means  for  investment.  ... 

"  Bat  at  this  time  the  demand  notes  were  paid  out  freely  by  the 
Treasury,  and  began  to  appear  as  a  cause  of  embarrassment  among 
the  Banks  which  were  pressed  to  receive  them  upon  deposit ;  and 
while  they  could  not  decline  them  without  diminishing  public  con- 
fidence in  the  government  credit,  they  could  not  give  them  cur- 
rency without  impairing  their  own  specie  strength.  In  fact,  the 
notes  became  at  once  a  substitute  for  coin  withdrawn  from  circu- 
lation, and  their  emission  expressed  a  purpose  of  resorting  to  gov- 
ernment paper  issues  to  carry  on  the  war.  So  soon  as  these  notes 
thus  appeared,  the  reflux  of  coin  to  the  Banks  at  once  sensibly 
diminished.  During  three  weeks  from  the  7th  December,  the  re- 
serves of  the  Banks  in  New  York  fell  to  $29,357,712,  — a  loss  of 
thirteen  millions  within  that  short  period  ;  and  on  the  28th  Decem- 
ber, after  confcence  with  the  Secretary,  in  which  he  still  adhered 
to  the  views  before  expressed,  it  was  decided  as  expedient  for  the 
Banks  to  suspend  specie  payments. 


THE  BANKS  UNITE  TO  SUSTAIN  THE  GOVERNMENT.       561 

"At  that  moment  the  Associated  Banks  yet  held  over  forty  mill- 
ions in  coin,  and  it  was  still  possible  "for  them  to  continue  their 
advances  to  the  government  but  for  the  two  obstacles  thus  inter- 
posed. Before  entering  into  this  last  conference  with  the  Associ- 
ated Banks,  some  of  the  members  expressed  to  the  Secretary  the 
importance  of  continuing  his  relation  to  an  organization  which 
combined  so  much  of  experience,  capital,  and  financial  resource, 
and  which  was  yet  capable  of  rendering  the  government  invalu- 
able service  ;  and  that  if  an  irredeemable  paper  cui-rency  was  the 
inevitable  resort,  it  would  be  more  expedient  and  economical  for 
the  government  not  to  become  involved  in  its  dangers,  but  to 
impose  the  duty  and  responsibility  of  issuing  the  notes  upon  the 
Banks,  who  would  naturally  be  compelled  to  keep  the  day  of  re- 
demption continually  in  view.  Thus,  as  a  suspension  of  coin  pay- 
ment was  about  to  be  declared,  it  was  practicable  to  preserve  from 
distribution  and  set  aside  the  forty  millions  of  coin  then  owned  by 
the  Banks,  together  with  one  hundred  and  fifty  or  sixty  millions 
of  government  bonds,  which  could  be  taken  by  them  as  a  special 
security  for  two  hundred  millions  of  notes,  which  could  then  be 
immediately  issued  by  the  Associated  Banks  from  their  own  plates, 
and  be  verified  and  made  National  by  the  stamp  and  signature  of 
a  government  officer.  And  that  such  an  issue,  so  supported  by 
coin  and  bonds,  at  once  simple  and  expeditious,  would  serve  the 
temporary  purpose  required,  with  little  if  any  deterioration  below 
coin  value ;  and  that  it  would  be  then  practicable  for  the  Banks 
to  continue,  without  further  agitation,  their  advances.  But  the 
Secretary  declined  to  entertain  this  suggestion  ;  preferring  the  sys- 
tem of  National  Banks,  which  he  had  already  conceived. 

"  Looking  back  over  events  that  have  since  transpired,  it  must  be 
admitted  that  this  suggestion  possessed  true  merit.  It  would  have 
preserved  a  coin  basis  for  the  currency,  prevented  the  destructive 
expansion,  relieved  the  government  from  its  almost  inextricable 
entanglement  with  the  circulating  notes,  and  compelled  an  early 
restoration  of  coin  payments.  And  with  a  proper  use  of  the  ex- 
pedients and  machinery  of  Banks,  by  utilizing  their  power  of  affect- 
ing exchanges,  which  was  substantially  applied  by  the  Secretary  in 
the  National  Banking  system  without  reserve,  this  amount  would 
have  been  found  sufficient.  When  we  review  the  excessive  cost  of 
the  war,  the  vast  increase  of  the  National  debt,  and  the  public 
and  private  evils  which  a  profuse  currency  has  entailed  upon  the 
country,  it  must  appear  evident  that,  in  failing  early  to  use  and  to 
exhaust  all  those  means  and  appliances  of  commerce  and  banking 
that  the  experience  of  other  civilized  nations  has  proved  most 
effective,  a  great  and  irreparable  mistake  was  made.  .  .  . 

"  This  forcible  entry  of  the  government  into  the  private  affairs 
of  the  people,  so  utterly  at  variance  with  the  fundamental  principles 
of  our  system,  so  great  an  abridgment  of  personal  liberty,  and 
operating  as  a  tax  so  unequal  in  its  effects,  was  a  rigorous  measure 
of  war,  and  as  such  was  vindicated  only  as  a  temporary  act  of  dire 
necessity.  In  enforcing  this  unequal  burden.  Congress  did  not 
leave  the  holders  of  the  notes  without  some  measure  of  relief ;  but 

36 


562       CFRRENCY   AND   BANKING   IN   THE   UNITED   STATES. 

it  gave  to  all  the  option  of  converting  them  at  pleasure  into  a  six 
per  cent  ffold-interest-bearing  bond,  payable  in  twenty  years.  By 
this  means,  the  notes  became  equal  in  value  to  the  bonds  for  which 
they  were  made  exchangeable ;  and  while,  during  the  war,  the  pay- 
ments of  gold  interest  continually  operated  to  produce  a  curtail- 
ment  of  the  volume  of  the  notes  in  circulation,  the  return  of  peace 
opened  a  market  abroad  for  the  bonds,  which  would  have  insured 
the  early  and  entire  absorption  of  the  war  currency,  and  thus  clear 
the  way  for  specie  payments.  ,     ,      •      i 

"  But,  in  an  evil  hour  for  the  country,  other  counsel  obtained 
possession  of  the  good  judgment  of  the  Secretary ;  and,  yielding  to 
it,  he  consented  and  urged  Congress  to  withdraw  this  privilege  of 
converting  the  notes,  so  that  thenceforth  all  issues  were  made  with- 
out it.  All  notes  emitted  consequently  became  an  unmitigated 
burden  upon  commerce,  of  indefinite  duration,  from  which  there 
was  no  escape.  A  new  currency  was  created,  utterly  at  variance 
with  all  economic  laws,  and  in  conflict  with  all  recognized  rules 
of  commerce  and  exchange.  It  did  not,  like  all  sound  currency, 
naturally  spring  out  of  industry,  production,  and  trade  ;  but  it  was 
an  enforced  result  of  exhaustion  and  necessity.  It  did  not  come 
and  go,  following  the  beneficent  courses  of  commerce,  expanding 
and  contracting  with  the  times  and  seasons  that  required  it ;  but 
it  remained  an  unyielding,  inflexible  mass,  subject  only  to  the 
chances  and  vicissitudes  of  war.  As  the  war  progressed  and  the 
country  became  poorer,  this  currency  increased,  giving  new  instru- 
ments and  facilities  to  expend  just  in  proportion  as  the  means  of 
payment  were  consumed.  With  a  comjjulsory  currency  thus  made 
the  measure  of  prices,  and  daily  deteriorating  yet  still  increasing, 
is  it  strange  that  all  other  property  was  eagerly  sought  for  in  pre- 
ference to  this,  and  that  prodigal  expenditure  became  the  law  of 
the  land ?"i 

Such  were  the  financial  operations  of  the  new  administra- 
tion, up  to  the  30th  of  December,  1861,  —  to  the  suspension  of 
specie  payment,  and  the  issue  of  government  notes.  Without 
means,  without  sufficient  credit  or  faculty  to  provide  them, 
the  results  of  the  military  operations  of  the  government  in 
great  measure  disastrous,  Mr.  Chase,  in  his  extremity,  appealed 
to  the  Banks.  This  appeal  was  most  patriotically  responded 
to.  In  view  of  his  necessities  and  of  the  employment  of  the 
Banks  in  his  operations,  the  provisions  of  the  Act  creating 
the  Independent  Treasury  had  been  so  far  modified  as  to  allow 
the  use  of  their  circulation,  and  to  make  them  the  depositories 
of  the  public  moneys.  Pending  the  negotiations,  the  Banks 
earnestly  pressed  upon  Mr.  Chase  the  importance  of  liis  deal- 
ing with  them  as  their  own  customers  dealt  with  them,  and  of 
availing  himself  of  the  proceeds  of  their  loans,  by  drawing 

1  Financial  History  of  the  War,  by  George  S.  Coe,  President  of  the  American 
Exchange  Bank.     See  Bankers'  Magazine,  January,  1870. 


MR.  chase's   negotiations   WITH  THE   BANKS.        563 

upon  them  in  the  ordinary  course  of  business,  and  allowing 
them  to  pay  his  drafts  in  whatever  manner  their  holders  might 
designate.  The  Banks  assumed  that,  as  the  ordinar}^  opera- 
tions of  the  public  had  no  tendency  to  withdraw  their  coin, 
those  of  government,  if  conducted  in  a  similar  manner,  would 
exert  no  such  tendency  ;  that  in  this  way  the  war  might  be 
carried  on  by  the  use  of  their  paper,  symbolizing  merchandise 
at  the  value  of  coin.  To  a  request  and  to  reasons  so  pertinent 
and  judicious,  Mr.  Chase  turned  a  deaf  ear.  He  would  take 
nothing  in  payment  of  his  loans  but  coin.  The  result  is  the 
present  condition  of  the  country.  Had  he  taken  the  course 
pressed  upon  him,  the  specie  in  the  Banks  must  have  con- 
stantly increased,  not  only  from  the  products  of  our  mines, 
but  from  importations  which  were  being  made  in  very  large 
amounts.  The  exports  of  specie  from  the  country  the  j'ear 
preceding  the  war,  exceeded  the  imports  by  $57,996,154. 
During  the  first  year  of  the  war,  and  before  the  Banks  had 
suspended,  the  imports  over  exports  equalled  $22,558,791 ; 
making  in  a  single  year  a  change  in  favor  of  the  country  of 
180,554,945.  No  sooner  was  trouble  with  the  South  appre- 
hended, than  the  Northern  Banks  began  instinctively  to 
strengthen  themselves.  On  the  1st  of  January,  1860,  before 
any  suspicion  or  distrust  was  excited,  and  when  the  country 
was  in  an  eminently  sound  and  prosperous  condition,  the  coin 
reserves  of  the  Banks  of  the  three  great  cities.  New  York, 
Boston,  and  Philadelphia,  equalled  $29,822,320  ;  of  which  the 
Banks  of  New  York  held  $20,119,779;  those  of  Boston, 
$4,796,000  ;  those  of  Philadelphia,  $4,906,541.  On  the  1st 
of  January,  1861,  when  the  disruption  of  the  country  seemed 
imminent,  they  had  increased  their  reserves  to  $43,849,628  ; 
and  on  the  9th  of  August,  1861,  when  they  undertook  to  aid 
the  government,  to  $63,165,039.  There  was  no  concert  or 
method  in  all  this  ;  only  ordinary  prudence.  Even  so  late 
as  1862,  after  the  Banks  had  suspended,  and  Mr.  Chase  had 
drawn  from  them  $150,000,000,  they  held  $44,887,093  in  coin ; 
a  sum  greater,  by  $15,000,000,  than  that  held  on  .the  1st  of 
January,  1860.  Had  he  acceded  to  their  request  at  the  outset, 
he  might  have  availed  himself,  at  the  value  of  coin,  of  every 
dollar  of  capital  in  the  country  which  could  have  been  spared 
for  the  war.  No  sooner  did  the  Banks  enter  upon  their  under- 
taking,  than   they  brought    into  action    the   most    efficient 


564      CUERENCY  AND   BANKING  IN  THE   UNITED    STATES. 

method  ever  devised  for  its  object.  They  employed  all  the 
Banks  in  the  loyal  States,  numbering  some  twelve  hundred,  to 
become  their  brokers;  and  to  peddle  out,  over  their  own 
counters,  the  obligations  of  the  government,  which  were  of 
denominations  to  suit  every  class  of  purchasers,  —  the  capitalist 
with  his  millions,  and  the  day-laborer  who  had  accumulated 
a  few  months'  wages.  Such  was  the  intense  spirit  of  patriot- 
ism aroused  at  the  North  that  every  man  was  prepared  to  lay 
down  his  last  dollar  for  the  cause.  Starting  with  ample  re- 
serves, the  Banks  were  certain  of  having  these  re-enforced  from 
the  mines  of  the  country,  at  the  rate  of  a  million  dollars  each 
week,  in  addition  to  the  receipts  from  abroad.  With  their 
constantly  increasing  strength,  the  public  securities  would 
steadily  have  advanced  in  demand  and  price,  so  as  to  have 
commanded  at  least  their  par  value  in  coin  ;  and  at  the  close 
of  the  war,  when  the  debts  incurred  in  its  prosecution  came  to 
be  paid,  they  would  be  paid  in  a  currency  of  the  same  value 
as  that  in  which  they  were  contracted,  instead  of  one  twice  as 
valuable.  As  it  was,  the  National  Debt  was  more  than  doubled, 
the  war  prolonged  to  twice  its  necessary  length,  the  public 
service  thoroughly  demoralized,  the  morals  of  the  country 
debauched,  and  innumerable  and  valuable  lives  sacrificed, 
merely  to  gratify  the  whim  or  selfish  purpose  of  a  man  igno- 
rant as  a  Hottentot  upon  the  matters  in  reference  to  which  he 
acted  with  such  reckless  levity.  More  than  fifteen  years  have 
elapsed  since  his  scheme  for  the  "  reformation  of  the  currency  " 
was  set  on  foot,  during  which  the  people  have  hardly  handled 
or  seen  a  dollar  of  gold  ;  while  they  have  now  a  far  more 
difficult  task  before  them,  in  the  restoration  of  the  currency 
from  the  condition  in  which  he  placed  it,  than  they  liad  in 
providing  the  means  of  putting  down  the  Rebellion. 

While  the  Banks  were  supplying  the  government  with 
money  (coin)  at  the  rate  of  more  than  a  million  dollars  daily, 
a  potent  element  of  mischief — one  which  caused  and  precipi- 
tated their  suspension,  and  at  the  same  time  that  of  the  gov- 
ernment, and  led  to  the  issue  of  legal-tender  notes  —  was  an 
issue  by  Mr.  Chase  of  demand  notes,  payable  in  coin  (au- 
thority having  been  given  him  therefor,  to  the  extent  of 
150,000,000,  afterwards  increased  to  860,000^,000).  Against 
their  issue  the  Banks  earnestly  remonstrated.  The  government 
had  not  a  dollar  for  their  payment  but  what  these  supplied. 


]Vm.  CHASE   ISSUES   GOVERNMENT   NOTES.  565 

It  was,  in  effect,  the  exhaustion  of  their  means  to  an  equal 
amount.  For  the  loans  made  directly  by  the  Banks  they  re- 
ceived government  securities,  by  means  of  the  sale  of  which 
they  were  speedily  reimbursed  their  advances.  The  process 
was  perfectly  natural  and  healthy.  They  had  nothing  to  fear 
so  long  as  they  could  sell  securities  as  fast  as  they  contracted 
to  supply  money.  The  result  showed  that  they  could  do  this, 
at  the  outset,  at  the  rate  of  more  than  a  million  dollars  in  coin 
daily,  and,  when  confidence  was  at  its  lowest  ebb,  without  seri- 
ously impairing  their  reserves.  Every  sale  they  made  prepared 
the  way  for  new  ones.  For  1863  their  advances  could  have 
equalled,  if  necessary,  a  million  and  a  half  a  day,  if  such  an 
amount  had  been  required,  —  certainly  if  they  had  been  made 
in  their  own  paper,  having  the  value  of  coin.  It  is  well 
known  that  the  customs  revenues  have  been  collected  in  gold 
to  the  amount  of  two  hundred  millions  annually,  by  the  use 
of  less  than  one-fifth  of  that  sum,  by  the  constant  return  of 
that  collected  into  circulation.  When  Mr.  Chase  came  into 
the  field,  it  was  not  to  sell  bonds  ;  not  to  get  that  in  hand  for 
which  he  had  years  to  pay ;  but  to  issue  his  own  promises 
payable  on  demand,  and  which  were  to  be  paid  by  some  one 
almost  as  soon  as  issued.  For  their  payment  he  did  not  at- 
tempt to  provide  a  dollar.  He  threw  them  upon  the  market  as 
money.  The  Banks  were  compelled  to  receive  them,  in  order 
to  protect  the  credit  of  the  government.  By  receiving  them 
on  deposit,  they  contracted  and  were  speedily  compelled  to 
discharge  them  in  coin.  For  these  notes  they  received  no 
bonds.  Their  only  mode  of  providing  the  means  therefor  was 
to  call  in  their  loans.  To  do  this  would  create  a  disturbance 
in  the  money  market,  which,  equally  with  the  discredit  of  the 
government,  would  defeat  altogether  their  great  undertaking. 
They  appealed  to  Mr.  Chase  to  desist ;  but  he  refused.  As 
the  notes  he  had  authority  to  issue  nearly  equalled  their 
reserves,  and  had  to  be  paid  out  of  them,  they  were  quite 
enough  to  break  the  Banks,  into  which  they  constantly  tended 
to  flow ;  although,  with  the  methods  employed  and  the  equiv- 
alents received,  the  latter  had  been  enabled  to  advance  to  the 
government  nearly  three  times  the  amount  of  such  notes,  with- 
out seriously  reducing  their  reserves.  As  he  persisted  in  his 
course,  and  as  the  event  sooner  or  later  was  inevitable,  the 
Banks  thought  it  wise  to  anticipate  it   by  suspending  with 


666      CUREENCY  AND    BANKING   IN   THE   UNITED   STATES. 

comparatively  full  cofeers.  They  held  at  the  time  the  extraor- 
dinarily large  sum  of  144,887,893.  In  their  relation  to  the 
government,  they  should  have  acted  simply  as  brokers,  to  turn 
its  securities,  if  possible,  with  sufficient  rapidity  to  supply  its 
necessities,  —  at  least  as  fast  as  customers  could  be  found  for 
their  purchase.  Mr.  Chase's  chief  care  should  have  been  not 
to  have  drawn  a  dollar  in  coin  from  them  ;  and  not,  perma- 
nently, a  dollar  of  their  capital.  All  he  wanted  was  that, 
which  would  purchase  articles  necessary  for  the  support  of 
the  war.  His  object  was  accomplished  so  long  as  the  paper 
of  the  Banks  would  do  this  as  cheaply  as  coin.  The  stronger 
their  position,  the  better  could  they  dispose  of  his  securities. 
Their  aggregate  share  capital  was  far  less  than  the  amount 
with  which  they  supplied  him,  in  the  short  period  of  five 
months.  In  order  to  sell  his  securities,  the  money  market  was 
to  be  kept  in  an  easy  condition.  For  such  purpose,  the  whole 
capital  of  the  Banks  with  which  he  dealt  should  have  been 
held.  In  ordinary  times  Banks  cannot,  nor  should  they,  part 
with  a  dollar  of  their  reserves.  To  part  with  them  is  always 
a  sign  of  weakness,  —  that  losses  or  bad  debts  have  been 
made.  At  the  time  of  the  suspension  of  the  Banks,  Dec.  30, 
1861,  the  amount  of  demand  notes  outstanding  equalled 
$33,460,000,  mostly  held  by  the  Banks,  and  for  which  they 
had  been  compelled  to  part  with  a  corresponding,  or  at  least 
with  a  large  amount  of  gold.  The  process  seemed  a  perfectly 
simple,  but  proved  to  be  a  thoroughly  fatal  one.  INIr.  Chase 
undertook  to  become  an  issuer  of  a  convertible  currencv,  with- 
out  the  provision  of  any  means  for  its  redemption.  His  defeat 
was  only  another,  but  a  crowning  example  of  an  undertaking 
which  can  have  but  one  issue.  From  it  should  have  been 
learned  a  lesson  which,  if  well  heeded,  would  have  helped  to 
unlock  all  the  mysteries  of  paper  money.  The  government, 
for  the  time,  was  wholly  without  means.  The  coin  which  the 
Banks  had  paid  it  had  been  expended.  It  had  no  bank-notes, 
nor  could  it  get  any.  Its  wants  in  money  equalled  a  million 
and  a  quarter  daily.  Its  revenues  did  not  equal  one-tenth  that 
amount.  Now,  if  the  doctrine  of  every  writer  upon  the  sub- 
ject of  money,  that  worthless  bits  of  paper,  by  calling  them 
money,  may,  from  the  necessity  of  their  use,  be  maintained  at 
the  par  value  of  coin  ;  or  that  of  most  writers,  that  they  may, 
by  limiting  their  amount,  be  raised  to  any  possible  pitch  of 


SUSPENSION  OP  THE  GOVERNMENT  ON  ITS  NOTES.        567 

value  ;  or  that  of  Mr.  Fawcett,  of  the  most  moderate  school 
of  the  Economists,  that  a  government  engaged  in  war  may 
issue  its  own  inconvertible  paper,  equal  to  its  increased  ex- 
penditures, which  will  be  maintained  at  the  par  of  coin  from 
the  necessity  of  its  use,  —  be  true,  why  was  it  that  the  United 
States  notes,  issued  to  meet  the  expenditures  of  the  War  of 
the  Rebellion,  and  equalling  the  paltry  sum  of  only  $33,460,000, 
should,  at  the  moment  that  five  times  that  amount  was  rcvquired, 
fall  to  a  discount  so  soon  as  government  suspended ;  selling 
in  the  market,  like  all  other  kinds  of  property  or  securities, 
only  at  their  estimated  value  ?  Till  this  question  be  answered, 
how  absurd  for  writers  to  repeat  stale  assertions,  as  impossible 
in  realization  as  that  heavy  bodies  should  fly  from  instead  of 
to  the  earth  !  and  how  ridiculous  for  our  present  Secretary  of 
the  Treasury  to  prate  about  the  ease  with  which  some  four 
hundred  millions  of  government  notes  may  be  maintained  at 
the  par  value  of  coin,  without  any  adequate  provision  for  their 
conversion  into  coin  or  merchandise,  at  the  very  time  that  the 
commercial  currency  of  the  country  is  probably  inflated  to  the 
extent  of  $300,000,000 ! 

The  position  of  the  demand  notes  was  indeed  most  anoma- 
lous. Government  could  not  pay  them.  They  bore  no  inter- 
est. The  Treasury  notes,  bearing  interest  at  the  rate  of  6  per 
cent  and  receivable  in  payment  of  the  revenues,  were  at  a 
discount  of  about  1  and  one-half  per  cent.  These  could  be 
absorbed  —  taken  out  of  the  market  —  from  the  interest  they 
bore.  No  one  wanted  non-interest-bearing  notes,  when  inter- 
est-bearing ones  could  be  had.  The  Banks  were  no  longer 
willing  to  receive  them,  and  got  rid  of  them  as  fast  as  possible 
by  paying  them  out  over  their  counters  to  such  of  their  cus- 
tomers as  were  willing  to  take  them.  In  all  business  and 
monetary  circles  they  were  unwelcome  intruders,  —  an  incon- 
gruous element,  the  nature  of  which  no  one  understood,  and 
which  all  wished  to  avoid.  No  one  could  be  compelled  to 
receive  them.  They  would  not  have  been  taken  on  any  terms, 
but  for  the  fact  that  they  were  receivable  for  the  revenues. 
In  every  transaction  in  which  they  were  used,  they  were  the 
unpleasant  reminders  of  the  poverty  and  broken  faith  of  the 
government.  It  was  as  if  the  dishonored  check  of  a  merchant 
were  hawked  about  the  streets  till  it  found  a  purchaser,  at  a 
discount,  in  some  one  indebted  to  the  drawer,  and  who  could 


568      CURRENCY  AND   BANKING  IN  THE   UNITED   STATES. 

use  it  by  way  of  offset.  No  one  would  take  them  as  money, 
in  the  proper  sense  of  that  word.  Government  saw  at  once 
that  it  could  not  get  along  with  such  expedients  as  these  : 
that  the  only  way  in  which 'it  could  make  its  notes  circulate 
as  money  was  to  compel  their  circulation,  by  making  them 
competent  to  discharge  all  contracts  ;  for  so  far  they  were  to 
indebted  parties  the  equivalent  of  gold. 

As  the  suspension  of  the  Banks  was  a  precautionary  meas- 
ure, rather  than  the  result  of  any  immediate  necessity,  they 
would  undoubtedly  have  speedily  resumed,  but  for  the  imme- 
diate provision  for  the  issue  of  legal-tender  notes.  They  were 
sufficiently  strong, -and  proposed  to  Mr.  Chase  a  plan  by  which 
the  war  could  still  be  carried  on  by  the  use  of  their  paper  at 
the  value  of  coin,  or  at  only  a  slight  discount  from  coin.  Upon 
their  suspension,  from  the  apprehension  naturally  created, 
gold  rose  in  January  to  a  premium  of  about  3  per  cent,  to 
fall  off  by  the  middle  of  March  to  about  1  per  cent.  Mr. 
Chase,  however,  was  wholly  averse  to  an}'-  arrangement  with 
them.  The  object  nearest  his  heart  was  not  money  so  much 
as  the  breaking  down  of  the  financial  system  which  he  found 
in  existence  on  his  accession  to  office,  —  which  was  in  a 
thorouglily  healthy  and  strong  condition,  and  by  means  of 
which  alone  the  war  could  be  conducted  on  a  specie  basis  ; 
and  to  substitute  in  its  place  his  own,  from  which  the  proper 
constituent  for  conversion  was  to  be  wholly  eliminated  ;  and 
that,  too,  in  the  very  face  of  the  tremendous  struggle  in  which 
the  nation  was  already  engaged.  At  the  very  moment  when 
the  Banks  were  advancing  him  $150,000,000,  he  declared  them 
to  be  unworthy  of  credit ;  that  "  their  currency  was  incongru- 
ous, unequal,  and  unsafe."  Their  failure,  which  was  his  own 
work,  was  his  first  great  triumph. 

Such  is  a  brief  account  of  the  early  financial  operations  of 
the  government,  of  the  suspension  of  payment  by  the  Banks, 
and  of  the  reasons  for  the  issue  of  the  government  notes. 
Never  did  consequences  more  momentous  hang  upon  questions' 
apparently  more  insignificant  in  themselves,  —  whether  the 
notes  of  the  Banks  of  the  three  great  cities  should  be  used, 
and  whether  Mr.  Chase  would  deal  with  them  on  the  same 
footing  as  other  customers,  or  demand  payment  of  all  his  loans 
in  coin.     They  were  questions,  however,  which  lay  at  the  very 


SUSPENSION  OF  THE  BANKS.  569 

root  of  the  most  important  functions  and  operations  of  soci- 
ety, —  the  modes  by  which  its  means  can  be  best  transferred 
and  utilized.  Could  the  consequences  have  been  foreseen,  the 
Banks  would  undoubtedly  have  stood  upon  their  convictions. 
As  their  objections  were  vital,  they  should  have  been  insisted 
upon.  The  disasters  that  resulted  should  have  been  inferred 
from  the  violation  of  so  obvious  a  duty  or  rule.  Had  they 
persisted,  Mr.  Chase  would  in  the  end  have  yielded,  or,  what 
was  far  better,  would  have  been  compelled  to  give  up  his  place- 
One  would  have  supposed  that,  after  he  had  been  lifted  out  of 
his  embarrassments  by  the  Banks,  and  had  had  such  proof  of 
their  patriotism  and  financial  strength,  he  would  most  readily 
have  deferred  to  their  suggestions,  in  matters  coming  so  pecu- 
liarly within  their  own  experience,  and  in  which  he  must  have 
known  them  to  be  far  better  fitted  to  advise  and  direct  than 
himself.  Among  the  managers  of  the  hundred  and  twenty 
Banks  which  formed  the  association,  were  men  of  the  most 
eminent  weight  and  influence,  in  social  as  well  as  in  monetary 
circles,  — men  who  were  uninfluenced  by  party  ties  or  animosi- 
ties, whose  experience  could  be  confidently  appealed  to,  and 
who  had  no  purpose  apart  from  the  general  welfare.  If  results 
be  the  test,  certainly  no  conduct  could  have  been  more  crimi- 
nal than  to  refuse  to  give  ear  to  persons  so  well  fitted  to 
counsel  and  guide.^ 

The  Banks  having  suspended,  and  with  them  the  govern- 
ment, what  was  Mr.  Chase  to  do  ?  The  following  extracts 
from  his  Second  Annual  Report  will  give  his  answer :  — 

"  The  Banks  of  New  York  suspended  on  the  30th  of  December, 
1861.     Their  example  was  followed  by  most  of  the  Banks  through- 

1  The  following  is  the  section  of  the  Act  authorizing  a  National  Loan,  j^rovid- 
ing  for  a  modification  of  the  Independent  Treasury  :  — 

"  Section  6.  And  be  it  further  enacted:  That  the  provisions  of  the  Act  en- 
titled, '  An  act  to  provide  for  the  better  organization  of  the  Treasury,  and  for 
the  collection,  safe-keeping,  transfer  and  disbursements  of  the  public  revenues,' 
passed  August  6,  1846,  be  and  the  same  are  hereby  suspended,  so  fiir  as  to  allow 
the  Secretary  of  the  Treasury  to  deposit  any  of  the  monej's  obtained  on  any  of 
the  loans  now  authorized  by  law,  to  the  credit  of  the  Treasurer  of  the  United 
Slates,  in  such  solvent  specie-paying  Banks  as  he  may  select ;  and  the  said 
moneys,  so  deposited,  may  be  withdrawn  from  such  deposit  for  deposit  with  the 
regular  authorized  depositories,  or  for  the  payment  of  public  dues,  or  paid  in 
redemption  of  the  notes  authorized  to  be  issued  under  this  Act,  or  the  Act  to 
which  this  is  supplementary,  payable  on  demand,  as  may  seem  expedient  to,  or 
be  directed  by,  the  Secretary  of  the  Treasury."  * 

*  Appendix  Congressional  Globe,  1st  Session  37tli  Congress,  p.  41. 


670      CURRENCY   AND   BANKING   IN   THE   UNITED   STATES. 

out  the  country ;  and  government  yielded  to  tlie  same  necessity  in 
respect  to, the  United  States  notes  then  in  circulation. 

"  These  changed  circumstances  required  a  change  of  measures. 
The  expenditures  had  already  reached  an  average  of  nearly  a  mill- 
ion and  a  quarter  of  dollars  each  secular  day,  while  the  revenues 
from  all  sources  hardly  exceeded  one-tenth  of  that  sum.  It  was 
necessary,  therefore,  to  raise  by  loans  in  some  form  about  thirty 
millions  a  month,  or  sixty  milUons  for  every  sixty  days. 

"  Careful  inquiries  satisfied  the  Secretary  that  tlie  first  $60,000,000 
could  not  be  had,  in  coin,  at  better  rates  than  a  dollar  in  bonds 
for  eighty  cents  in  money ;  and  that  each  succeeding  loan  would 
involve  submission  to  increasingly  disadvantageous  terms.  To  ob- 
tain the  first  160,000,000  would  require,  therefore,  an  issue  of  bonds 
to  the  amount  of  $75,000,000,  and,  of  course,  an  increase  of  the 
public  debt  by  the  same  sum ;  the  next  $60,000,000  would  require, 
perhaps,  $90,000,000  in  bonds  and  debt;  and  the  next  $60,000,000, 
if  obtainable  at  all,  would  require  perhaps  $120,000,000.  _  It  was 
easy  to  see  that,  on  this  road,  utter  discredit  and  paralysis  would 
soon  be  reached.  The  adoption  of  a  plan  of  finance  involving  such 
consequences  was  not  compatible  with    the    Secretary's  ideas  of 

public  duty. 

«  There  remained  but  one  other  possible  way  of  raising  money 
by  the  negotiation  of  bonds  in  the  usual  mode.  That  way  was  to 
receive  in  payment  of  loans  the  notes  or  credits  of  the  Bauks  in 
suspension. 

"  To  ascertain  what  would  have  been  the  consequences  of  a  re- 
sort to  this  expedient,  it  is  necessary  to  remember  that  the  Bank 
circulation  of  the  loyal  States  amounted,  on  the  1st  day  of  January, 
1861,  to  $150,000,000;  that  it  had  been  reduced  to  $130,000,000 
on  the  1st  day  of  January,  1862  ;  and  that  this  circulation  was 
diffused  throughout  the  country  in  all  the  channels  of  business. 
In  these  circumstances,  the  collection  by  loans  of  sufficient  amounts 
to  meet  the  demands  upon  the  Treasury  in  season  for  prompt  pay- 
ments would  be  extremely  difficult.  The  negotiation  of  such  loans 
to  the  extent  required  by  the  public  exigencies  would  create  a 
demand  for  the  notes,  which  would  involve  the  necessity  at  first 
of  sacrifices  not  greatly  inferior  to  those  attendant  on  coin  loans. 
If  subsequent  negotiations  should  become  practicable  at  seemingly 
better  rates,  it  would  be  because  the  government  demand  had 
stimulated  the  making  and  issuing  of  bank-notes  to  an  extent  far 
beyond  the  ordinary  needs  of  business.  The  increase  of  circula- 
tion thus  stimulated  would  be  unlimited,  except  by  the  possibility 
of  obtaining  interest  on  loans  of  it ;  or,  in  other  words,  by  the  pos- 
sibility of  obtaining  credit  for  it  with  the  community  and  the  gov- 
ernment. This  limit,  certain  to  be  finally  reached  by  all  Banks 
improvidently  managed,  would  not,  however,  be  reached  immedi- 
ately or  at  the  same  time  by  all  institutions,  or  by  the  same  rate  of 
progress  in  all  parts  of  the  country.  But  an  excessive  circulation 
would  surely  be  thrust  upon  the  community ;  forming  a  currency 
the  business  of  the  people,  and  to  embarrass,  if  not  arrest,  the  op- 
erations of  the  government.  Loans  negotiated  in  this  circulation 
would  be  simply  exchanges  of  the  debts  of  the  nation,  bearing  in- 


CHASE  URGES  THE  ISSUE   OF  LEGAL-TENDER  NOTES.      571 

terest  and  certain  to  be  paid,  for  the  debts  of  a  multitude  of  coi^po- 
rations,  bearing  no  interest,  and  certain,  in  part,  never  to  be  paid."  ^ 

As  ^Ir.  Chase  assumed  that  he  could  borrow  neither  coin 
nor  bank-notes,  and  as  he  could  not,  without  full  provision  for 
their  jjayment,  make  plain  notes  circulate  as  money,  he  bent 
all  his  energies,  as  the  only  alternative,  to  secure  an  issue  of 
legal-tender  notes.  In  a  letter  addressed,  under  date  of  Jan. 
29,  1862,  to  Mr.  Stevens,  Chairman  of  the  Committee  of 
Ways  and  Means  of  the  House,  he  said  :  — 

"  The  provision  making  United  States  notes  a  legal  tender  has 
doubtless  been  well  considered  by  the  Committee,  and  their  con- 
clusion needs  no  support  from  any  observations  of  mine.  I  think 
it  my  duty,  however,  to  say  that,  in  respect  to  this  provision,  my 
reflections  have  conducted  me  to  the- same  conclusions  they  have 
reached."  ' 

On  the  7th  of  June,  1862,  Mr.  Chase  addressed  a  communi- 
cation to  the  Committee  of  Ways  and  Means  (accompanied  by 
a  bill  of  his  own  drafting  providing  therefor),  asking  for  a 
further  issue  of  8150,000,000  of  legal-tender  notes.  In  his 
communication  he  said  :  — 

"  He  proposed  that  authority  be  given  to  the  Secretary  of  the 
Treasury  to  issue  $150,000,000  in  United  States  notes,  in  addition 
to  the  issue  already  authorized,  and  that  these  be  a  made  legal  tender 
for  dehtsr » 

In  reference  to  the  issue  of  notes  after  it  was  made,  he 
said :  — 

"  No  other  mode  of  providing,  with  any  tolerable  degree  of 
promptitude,  for  the  wants  of  the  army  and  the  necessities  of  other 
branches  of  the  public  service,  seemed  likely  to  effect  the  object 
with  so  little  public  inconvenience  and  so  considerable  public  ad- 
vantage as  the  issue  of  United  States  notes,  adapted  to  circula- 
tion as  money,  and  available  therefor  immediately  in  government 
payments.  .  .  .  The  choice  was  now  to  be  made  between  a  cur- 
rency furnished  by  numerous  and  unconnected  Banks,  in  various 
States,  and  a  currency  furnished  by  the  government,  which  the 
government  could  and  would,  except  in  a  very  improbable,  not  to 
say  impossible,  contingency,  amply  provide  for  and  protect.  With 
these  alternatives  before  him,  tlie  Secretary  had  already  declared 
his  unhesitating  preference  for  a  circulation  authorized  and  issued 
by  national  authority.^ 

"  The  recommendations  now  submitted,  of  a  limited  "  (further) 

1  Report  of  tlie  Sectretary  of  the  Treasury,  for  1862,  pp.  7,  8. 

2  Spaulding's  Financial  History  of  the  War  of  the  Rebellion,  p.  45. 
8  Ibid.  p.  155. 

*  Report  of  the  Secretary  of  the  Treasury,  for  1862,  pp.  8,  9. 


572      CURRENCY  AND   BANKING   IN   THE   UNITED   STATES. 

"  issue  of  United  States  notes,  as  a  wise  expedient  for  the  present 
time,  and  as  an  occasional  expedient  in  future  times,  .  .  .  are 
prompted  by  no  favor  to  excessive  issues  of  any  description  of 
credit  money."  ^ 

"  In  former  reports,  the  Secretary  has  stated  his  convictions,  and 
the  grounds  of  them,  respecting  the  necessity  and  the  utility  of 
putting  a  large  part  of  the  debt  in  the  form  of  United  States 
notes,  without  interest,  and  adapted  to  circulation  as  money. 
These  convictions  remain  unchanged,  and  seem  now  to  be  shared 
by  the  people.  For  the  first  time  in  our  history  has  a  real  approach 
to  a  uniform  currency  been  made  ;  and  the  benefits  of  it,  though 
Btill  far  from  the  best  attainable  condition,  are  felt  by  all.  The 
circulation  has  been  distributed  throughout  the  country,  and  is 
everywhere  acceptable.  It  is  a  gratification  to  know  that  a  tribu- 
nal so  distinguished  by  the  learning  and  virtues  of  its  members  as 
the  Supreme  Court  of  New  York  has  given  the  sanction  of  its 
judgment  to  the  constitutional  validity  of  the  law."^ 

Upon  the  suspension  of  the  Banks  due  solely  to  his  folly 
and  obstinacy,  and  that  of  the  government,  which  necessarily 
followed  in  their  train,  Mr.  Chase  could  see  but  one  course 
open  for  him.  The  government  suspended  upon  its  demand 
notes,  equalling  in  amount  only  $33,460,000  ;  although  these 
were  equally  receivable  with  coin  in  payment  of  the  rev- 
enues. What  folly  could  have  been  greater  than  to  allow 
government  to  break  for  such  a  paltry  sum  ?  As  the  notes  were 
receivable,  and  were  constantly  being  paid  into  the  Treasury, 
in  the  collection  of  the  revenues,  a  few  millions  of  dollars  would 
have  been  sufficient  to  have  maintained  them  at  par,  —  to 
have  taken  in  such  as  were  not  returned  through  the  revenues. 
What  was  the  result,  at  least  in  Mr.  Chase's  estimation  ?  That 
its  suspension  had  so  far  destroyed  the  credit  of  the  govern- 
ment that  he  could  not  hope  to  borrow  from  the  public,  coin 
which  the  Banks  had  paid  him  in  exchange  for  its  securities 
at  par,  on  any  better  terms  than  100  of  the  former  to  80  of 
the  latter  ;  and  at  this  rate,  for  only  860,000,000,  to  be  supplied 
in  sixty  days.  For  the  second  $60,000,000,  to  be  supplied 
within  four  months,  he  would  have  to  give  $90,000,000  in 
bonds;  and  for  the  third,  $120,000,000.  Certainly,  money 
was  not  to  be  borrowed  on  such  terms  as  these  !  He  forced 
the  government  to  suspend,  and  then  proclaimed  to  the  world 
that  no  one  would  trust  it.     In  turning  in  the  direction  of  the 

1  "Report  of  the  Secretary  of  the  Treasury,  for  1862,  p.  21. 

2  Report  of  the  Secretary  of  the  Treasury,  for  1863,  p.  15.       * 


DECLINE  IX  VALUE  OF  THE  GOVERNMENT  NOTES.    573 

Banks,  the  prospect  was  equally  discouraging.  The  circulation 
of  those  of  the  Northern  States  had  fallen  from  '$150,000,000, 
at  the  beginning  of  the  year,  to  1130,000,000  near  its  close ; 
and  this,  he  said,  was  so  distributed  in  the  channels  of  com- 
merce, that  it  could  not  be  reached  on  any  better  terms  than 
coin,  if  an  attempt  were  made.  If  it  were  made,  the  notes 
would  be  supplied  in  such  abundance  as  to  very  speedily 
become  worthless  ;  so  that'  the  process  of  borrowing  would  be 
simply  an  exchange  of  the  debts  of  the  nation,  bearing  interest 
and  certain  to  be  paid,  for  debts  of  a  multitude  of  corpora- 
tions, bearing  no  interest,  and  certain,  in  part,  never  to  be  paid. 
Mr.  Chase  held  Banks  to  be  a  sort  of  "  confidence  "  concerns, 
and  their  managers  a  set  of  shysters,  always  seeking  to  im- 
pose their  worthless  issues  upon  every  feeble  and  derelict 
subject  with  whom  they  came  in  contact.  It  is  to  be  remem- 
bered, that  he  dealt  only  with  those  of  New  York,  Boston, 
and  Philadelphia  :  it  was  not  necessary,  nor  was  it  proposed, 
that  he  should  deal  with  any  others.  The  former  had  rela- 
tions with  all  the  other  Banks  in  the  United  States,  and  could 
avail  themselves  of  all  the  aid  these  could  furnish.  Had  he 
been  told  that  they  dealt  in  solid  capital,  supplying  to  every 
borrower  the  full  amount  of  his  loan,  either  in  coin  or  its 
equivalent,  he  would  have  been  as  incredulous  as  if  he  had 
been  told  that  money  grew  on  trees. 

The  statement  was  omitted  in  its  proper  place,  that,  imme- 
diately upon  the  passage  of  the  first  legal-tender  Act,  this 
paving  the  way.  Congress,  upon  the  application  of  Mr.  Chase, 
passed  a  bill  making  the  notes  issued  under  that  of  July,  1861, 
and  the  amended  Act  of  February  12,  1862,  legal  tender  in 
the  discharge  of  all  contracts  ;  the  professed  object  being  to 
raise  their  value  by  enlarging  the  sphere  of  their  use.  They 
were  previously  at  a  considerable  discount,  as  they  would  only 
pay  debts  due  to  the  government.  The  Banks  in  the  leading 
cities  would  not  receive  them  as  money.  Their  value  was 
raised  by  their  being  made  receivable  in  the  payment  of  debts 
to  individuals  as  well  as  to  the  government.  They  still  re- 
mained at  a  discount  from  gold,  for  the  reason  that  they  could 
not,  as  legal  tender,  serve  all  the  uses  of  gold.  The  whole 
question  of  value  was  one  of  uses.  The  law  which  regulated 
their  value  could  have  been  comprehended  by  a  child.  Its 
simple  statement,  properly  attended  to,  would  have  unlocked 
to  Mr.  Chase  all  the  mysteries  of  money.     That  neither  he  nor 


574       CURRENCY  AND   BANKING    IN   THE   UNITED   STATES. 

those  who  followed  him  should  have  made  so  simple  a  dis- 
covery, is  another  evidence  of  the  complete  mastery  which  the 
oTOundless  dogmas  laid  down  in  the  books  have  obtained  over 

the  public  mind. 

Mr.  Chase  would  not  attempt  to  borrow  coin  or  bank-notes, 
from  the  excessive  rate  of  interest  he  would  be  compelled  to 
pay,  by  the  low  price  of  government  bonds.  But  did  an  issue 
of  his  own  notes  enable  him  to  come  at  that  which  he  wished 
to  purchase,  at  any  more  favorable  rate?  He  had  already 
asserted  government  to  be  unworthy  of  credit ;  that,  should 
he  attempt  to  borrow  on  its  bonds,  they  would  not  bring  fifty 
cents  on  the  dollar.  He  now  demonstrated  his  assertion  by 
issuing  a  forced  loan.  Could  he  resort  to  such  an  extraordi- 
nary expedient  without  paying  a  higher  rate  of  interest,  or, 
what  is  the  same  thing,  a  higher  rate  for  what  he  wished  to 
purchase,  than  he  would  have  been  compelled  to  pay  by  bor- 
rowing in  the  ordinary  mode  ?  The  legal-tender  notes  gave 
him  no  authority  to  seize  what  he  wanted  at  his  own  price. 
He  must  still  go  into  the  market  with  a  broken  credit,  and 
with  expedients  the  last  resort  of  imbecility  and  exhaustion, 
and  sell  them  for  what  they  would  bring.  What  would  be 
thought  of  a  merchant  who  should  resort  to  similar,  or  to  any 
extraordinary  expedients  for  the  purpose  of  supporting  his 
credit,  and  of  supplying  himself  with  means  ?  Would  not  such 
action  wholly  destroy  what  little  he  had  remaining  ?  A  govern- 
ment is  in  a  position  precisely  similar.  In  its  relation  to  capital, 
it  is  subject,  like  individuals,  to  all  the  laws  that  control  it  or 
its  use.  It  has  indeed,  or  is  assumed  to  have,  a  power  not 
possessed  by  individuals,  —  that  of  giving  to  its  promises,  pay- 
able at  its  pleasure  and  perhaps  never  to  be  paid,  a  compe- 
tency to  discharge  debts  at  the  value  of  coin.  No  sooner, 
therefore,  does  it  issue  its  notes,  than  it  finds  plenty  of  parties 
eager  to  accept  them,  and  supply  it  with  whatever  it  wants, 
provided  they  can  use  such  promises  as  a  means  of  paying  their 
own  debts  at  the  value  of  coin.  From  the  first,  however,  the 
holders  of  merchandise  have  the  government  in  their  power, 
as  it  must  always  yield  to  them  in  the  matter  of  price.  But 
as  soon  as  contracts  in  existence  at  the  time  of  the  issue  of 
government  notes,  are  discharged,  these  will  speedily  fall  in 
price  to  their  estimated  value.  This  was  not  long  in  happen- 
ing to  the  United  States  notes.  By  the  loth  of  October,  1862, 
when  the  second  batch  began  to  get  into  circulation,  gold  had 


DECLINE  EST  VALUE  OF  THE  GOVERNilENT  NOTES.        575 

risen  to  a  premium,  payable  in  them,  of  37f  per  cent.  The 
public  ascribed  this  advance  to  an  inflation  of  the  currency. 
Mr.  Chase  denied  the  assertion.  The  currency  was  not  in- 
flated.    To  use  his  own  language,  — 

"  It  is  true  that  gold  commands  a  premium  in  notes  ;  in  other 
words,  that  to  purchase  a  given  amount  of  gold  a  greater  amount 
in  notes  is  required.  But  it  is  also  true  that,  on  the  suspension  of 
specie  payments  and  the  substitution  for  coin  of  United  States 
notes,  convertible  into  six  per  cent  specie  bonds  as  the  legal  stand- 
ard of  value,  gold  became  an  article  of  merchandise,  subject  to  the 
ordinary  fluctuations  of  supply  and  demand,  and  to  the  extraordi- 
nary fluctuations  of  mere  speculation^  The  ignorant  fears  of  for- 
eign investers  in  national  and  State  bonds  and  other  American 
securities,  and  the  timid  alarms  of  numerous  nervous  individuals 
in  our  own  country,  prompted  large  sacrifices  upon  evidences  of 
public  and  corporate  indebtedness  in  our  markets,  and  large  pur- 
chases of  coin  for  remittance  abroad  or  hoarding  at  home.  Taking 
advantage  of  these  and  other  circumstances  tending  to  an  advance 
of  gold,  speculators  employed  all  the  arts  of  the  market  to  stimu- 
late that  tendency  and  carry  it  to  the  highest  point.  This  point 
was  reached  on  the  15th  day  of  October.  Gold  sold  in  the  market 
at  a  premium  of  37f  per  cent. 

"  That  this  remarkable  rise  is  not  due  wholly,  or  even  in  greatest 
part,  to  the  increase  of  the  currency,  is  established  beyond  reason- 
able doubt  by  considerations  now  to  be  stated  :  — 

"  First.  The  whole  quantity  of  circulation  did  not,  at  the  time, 
greatly  if  at  all  exceed  the  legitimate  demands  of  payments.  On 
the  1st  day  of  November,  1861,  the  circulation  of  United  States 
notes,  including  credits  to  disbursing  oiBcers  and  to  the  Treasurer 
of  the  United  States,  was  $15,140,000.  On  the  1st  day  of  Novem- 
ber, 1862,  it  was,  with  like  inclusions,  1210,104,000.  Of  corporate 
notes,  on  the  1st  of  November,  1861,  the  circulation  in  the  loyal 
States  was,  according  to  the  best  estimates,  $130,000,000 ;  on  the 
1st  of  November,  1862,  it  Avas  $167,000,000.  The  coin  in  circula- 
tion, including  the  coin  in  Banks,  was  probably  not  less  on  the  1st 
of  November,  1861,  than  $210,000,000.  On  the  1st  of  November, 
1862,  the  coin  had  been  practically  demonetized  and  withdrawn 
from  use  as  currency,  or  as  a  basis  for  currency,  and  is  therefore  not 
estimated.  The  aggregate  circulation  of  the  loyal  States,  therefore, 
was,  at  the  first  date,  8355,140,000 ;  and  at  the  second,  only 
$377,104,000. 

"  Secondly.  The  whole,  or  nearly  the  whole,  increase  in  the  vol- 
ume of  the  currency  which  has  taken  place  was,  it  is  believed, 
legitimately  demanded  by  the  changed  condition  of  the  country  in 
the  year  between  the  two  dates.  The  activity  in  business  which, 
at  the  close  of  that  year,  had  taken  the  place  of  the  general  stag- 
nation which  marked  its  beginning ;  and  the  military  and  naval 
preparations  and  movements  which  had  vastly  augmented  the 
number  and  amounts  of  payments  to  be  made  in  money,  have,  it  is 
believed,  legitimately  demanded  nearly  or  quite  the  whole  of  it.  .  .  . 


576      CURRENCY  AND   BANKING   IN   THE   UNITED    STATES. 

"  Thirdly.  It  is  perhaps  still  more  conclusive  against  the  the- 
ory of  great  redundancy,  that,  on  the  15th  day  of  October,  when 
the  ao-o;regate  actual  circulation,  national  and  corporate,  was 
about*i360,000,000,  the  premium  on  gold  was  37f ;  whereas,  on 
the  29th  of  November,  when  the  circulation  had  increased  by 
more  than  twenty  millions,  the  premium  on  gold  was  20  to  30  per 
cent."  1 

An  inflated  currency,  no  matter  by  whom  issued,  is  that 
which  has  no  proper  constituent  in  merchandise  for  its  con- 
version. This  covers  the  whole  ground.  Such  was  Mr.  Chase's 
currency.  Instead  of  there  being,  as  he  stated,  no  inflation,  on 
or  near  the  1st  of  November,  1862,  it  is  demonstrable  that  it 
was  inflated  to  the  extent  of  nearly  $250,000,000.  The  lia- 
bilities of  the  Banks,  their  notes  and  deposits,  increased  from 
November,  1861,  to  November,  1862,  from  $480,114,487  to 
$632,303,444 ;  the  amount  of  increase  being  $152,248,957. 
The  increase  of  government  notes  during  the  year  equalled 
$194,964,000  ;  the  total  increase  of  paper  money  being  $347,- 
212,957.  The  amount  of  coin  in  the  country  on  the  1st  of 
November,  1861,  was  estimated  by  ]\Ir.  Chase  at  $210,000,000. 
Of  this  sum,  $102,146,215  were  held  by  the  Banks  as  reserves. 
The  amount  of  coin  held  in  reserve  on  November  1,  1862, 
equalled  $101,227,369.  Mr.  Chase  claimed  that  the  whole 
amount  of  coin  in  the  country  on  the  1st  of  November,  1861, 
had  been  demonetized  previous  to  the  1st  of  November,  1862. 
But  the  coin  held  by  the  Banks  in  1861  was  no  more  in  circu- 
lation at  that  time  than  that  held  by  them  in  1862.  It  was  no 
more  demonetized  at  one  period  than  another.  In  every 
return  which  the  Banks  have  made,  from  suspension  of  specie 
payments  to  the  present  time,  all  the  specie  held  by  them  has 
been  claimed,  and  allowed  by  the  government,  as  a  part  of 
their  reserves.  Deducting  the  difference  between  Mr.  Chase's 
estimate  (which  was  merely  conjectural)  of  the  amount  in  cir- 
culation, and  that  held  as  reserves  by  the  Banks,  the  amount 
demonetized  during  the  year  equalled  $108,772,631  ;  the  in- 
crease of  the  currency,  consequently,  equalled  $238,440,326. 
As  it  is  demonstrable  that  it  was  inflated  to  that  degree,  it  is 
useless  to  follow  out  Mr.  Chase's  explanation,  when  the  cause 
can  be  referred  to  its  proper  law,  which  he  wholly  ignored. 

1  Eeport  of  the  Secretary  of  the  Treasury,  for  1863. 


MR.  CHASE  DECLARES  THE  NOTES  UNCONSTITUTIOXAL.   577 

A  suspension  of  Banks,  when  they  have  no  relation  to  gov- 
ernments, is  always  a  temporary  expedient  or  measure.  The 
strong  resume  as  speedily  as  possible,  for  the  purpose  of  self- 
protection.  The  weak  have  at  once  to  go  into  liquidation. 
In  this  way  the  ground  is  soon  cleared.  The  strong  Banks 
well  know  that  the  only  way  in  which  they  can  .preserve  them- 
selves from  loss  is  to  compel  the  payment  of  their  bills  in  coin 
or  its  equivalent.  To  do  this,  they  must  set  the  example. 
Banks  can  no  more  carry  on  their  operations  without  paying 
their  liabilities  than  can  merchants.  A  merchant,  temporarily 
embarrassed,  may  be  allowed  to  remain  in  the  management  of 
his  aifairs,  as  the  best  means  of  securing  the  most  favorable 
results.  If,  however,  it  be  feared  that  he  is  neither  capable 
nor  upright,  he  has  speedily  to  give  place  to  his  creditors.  So 
with  Banks.  If  it  be  assumed  that  they  will  speedily  get  out 
of  their  difficulties,  they  are  allowed  to  do  so,  as  the  most 
competent  for  the  management  of  their  own  affairs.  There 
is  nothing  that  a  well-managed  Bank  dreads  so  much  as 
prolonged  suspension.  This  resorted  to,  it  is  compelled  for 
the  future  to  sail  without  compass  or  chart,  in  constant  fear 
of  making  shipwreck.  Upon  suspension,  its  first  thought  is 
resumption.  It  never  dreams  that  such  a  measure  is  to  become 
permanent.  The  Bank  of  England,  after  its  suspension  in 
1797,  restored  its  affairs  with  such  wonderful  celerity  as  to  be 
able  to  resume  within  three  years  ;  and  would  have  resumed, 
could  permission  have  been  obtained  from  the  government. 

Mr.  Chase  claimed  the  issue  of  the  government  notes  to  be 
among  the  most  brilliant  and  successful  acts  of  his  adminis- 
tration. He  pointed  with  pride  to  the  decision  of  the  Supreme 
Court  of  the  State  of  New  York,  the  leading  State  of  the 
Union,  affirming  its  constitutionality.  After  leaving  the  de- 
partment of  the  Treasury,  he  was  made  Chief  Justice  of  the 
Supreme  Court  of  the  United  States.  He  had  not  been  long 
in  his  new  place  before  the  question  of  the  constitutionality  of 
the  notes  issued  by  him  came  before  him  for  adjudication*. 
He  now  believed  that  they  were  likely  to  become  as  unpopular 
as  they  had  been  popular  ;  and  he  washed  his  hands  of  all  con- 
nection with  them,  denying  that  he  ever  even  suggested  the 

expediency  of  their  issue. 

37 


578      CURRENCY   AND   BANKING  IN   THE   UNITED    STATES. 

"  It  was,"  he  said,  "  my  fortune  at  the  time  that  the  United 
States  le<?al-tender  dause  was  inserted  in  the  hill  to  authorize  the 
issue  of  United  States  notes,  and  received  the  sanction  of  Congi-ess, 
to  be  charged  with  the  anxious  and  responsible  duties  of  procuring 
funds  for  the  prosecution  of  the  war.  In  no  report  made  by  me  to 
Congress  was  the  expedient  of  making  the  notes  of  the  United 
States  a  legal  tender  suggested^  ^ 

There  have  been  a  plenty  of  corrupt  and  servile  judges  ;  but 
it  is  doubtful  whether  history  affords  another  example  of  such 
absurd  untruthfulness.  Congress  passed  three  bills  author- 
izing the  issue  of  plain  legal-tender  notes.  Of  these,  ISIr. 
Chage  certainly  drew  one  with  his  own  hand.  In  the  decision 
in  the  case  referred  to,  he  speaks  of  the  legal-tender  clause  as 
a  sort  of  accident,  "  inserted  in  the  hill  to  authorize  the  issue 
of  United  States  notes."  There  was  no  "  insertion,"  for  the 
reason  that  the  sole  object  of  all  the  bills  was  to  create  an 
irredeemable  legal-tender  currency;  and  Mr.  Chase  urged  the 
passage  of  all,  from  their  alleged  necessity,  with  all  the  force 
of  which  he  was  capable.  The  facility  with  which,  in  this 
country,  such  men  reach  the  most  exalted  and  responsible  sta- 
tions, is  little  fitted  to  excite  our  national  pride. 

One  advantage  of  a  currency  of  depreciated  bank-notes  over 
the  depreciated  notes  of  a  government  is  the  uniformity  in 
value  of  the  formpr.  The  ''  books  "  of  a  Bank  tell  what  its 
notes  are  worth,  and  at  that  price  they  remain.  Those  famil- 
iar with  its  affairs  are  always  ready  to  take  them  at  their 
value.  All  understand  that  a  Bank  whose  notes  are  depreci- 
ated will  either  speedily  resume  or  be  wound  up  ;  and  that  in 
either  case  the  holders  of  its  notes  will  soon  receive  their 
value  in  coin.  By  what  book  is  the  value  of  the  depreciated 
notes  of  a  government  to  be  ascertained,  and  who  is  to  admin- 
ister upon  and  wind  up  its  affairs  ?  In  the  month  of  September, 
1864,  the  price  of  those  of  the  United  States  fluctuated 
between  187  and  254| ;  a  difference  of  67|-  per  cent  in  a 
few  days,  due  almost  wholly  to  the  varying  fortunes  of  the 
war.  A  great  disaster  would  send  up  the  price  of  gold  all 
the  way  from  10  to  20  per  cent.  A  great  victory  would  re- 
duce its  price  in  equal  ratio.  The  crowning  attribute  of  a 
competent  currency  is  that  its  value  is  wholly  independent  of 

1  Knox  V.  Lee,  12  Wallace's  Reports. 


MR.  chase's   system  OF  NATIONAL  BANKS.  579 

all  such  influences.  A  currency  depreciated  from  its  nominal 
value  is  by  no  means  an  intolerable  one.  Where  government 
does  not  interpose,  it  will  pass  only  at  its  real  value,  as  does 
the  silver  coin  of  the  United  States  at  the  present  time.  A 
bank-note,  where  its  constituent  is  worth  50  per  cent  of  its 
par  value,  will  pass  at  that  price.  No  one  is  deceived  or 
injured  in  taking  it.  It  will  not  rise  or  fall  much  above  or 
below  its  value.  Its  price  has  always  close  reference  to  its  act- 
ual worth.  The  mischief  comes  with  a  currency  the  value  of 
which  there  is  no  possible  means  of  determining,  but  to  which 
a  potency  is  sought  to  be  given  equal  to  that  of  coin  ;  and 
may  be  given,  as  far  as  debtors  are  concerned,  although  it  may 
prove  to  be  utterly  worthless  in  their  hands.  It  is  this  attribute 
of  discharging  debts,  without  reference  to  their  value,  which 
renders  all  government  currencies  so  intolerable.  In  the  two 
great  historical  examples,  the  currencies  became  worthless, 
although  having  at  one  time  the  price  of  coin.  It  is  a  cur- 
rency mischievous  from  the  very  beginning,  and  terribly  so 
where  the  issues  are  large.  Those  who  issue  it  will  always,  in 
the  end,  be  able  to  supply  their  necessities  far  better  without 
than  with  it.  Its  issue  is  a  crime  ;  and,  if  those  issuing  it  be 
not  criminals,  it  is  only  from  ignorance  of  its  nature  and  effect. 

The  currency  of  government  notes  having  been  secured, 
Mr.  Chase  returned  to  the  work  of  establishing  a  system  of 
banking,  to  be  created  by  the  United  States  ;  its  notes  to  be 
provided  for  by  the  deposit  of  bonds.  The  following  presenta- 
tion of  the  subject  is  taken  from  his  first  report,  under  date 
of  December  6th,  1861 :  — 

"  To  enable  the  government  to  obtain  the  necessary  means  for 
prosecuting  the  war  to  a  successful  issue,  without  unnecessary  cost, 
IS  a  problem  which  must  engage  the  most  careful  attention  of  the 
legislature.  The  Secretary  has  given  to  this  problem  the  best 
consideration  in  his  power,  and  now  begs  leave  to  submit  to  Con- 
gress the  result  of  his  reflections. 

"  The  circulation  of  the  Banks  of  the  United  States  on  the  1st  day 
of  January,  1861,  was  computed  to  be  1202,000,767.  Of  this  circu- 
lation, $150,000,000,  in  round  numbers,  was  in  the  States  now 
loyal,  including  Western  Virginia,  and  $50,000,000  in  the  rebellious 
States.  The  lohoU  of  this  circulatioti  constitutes  a  loan,  without 
interest.,  from  the  people  to  the  Banks,  costing  them  nothing  except 
the  expense  of  issue  and  redemption,  and  the  interest  on  the  specie 
kept  on  hand  for  the  latter  purpose  ;  and  it  deserves  consideration 


580      CUHRENCY   AND   BAXKIXG   IN   THE   UNITED    STATES. 

whether  sound  policy  does  not  require  that  the  advantages  of  this 
loan  be  transferred,  in  part  at  least,  from  the  Banks,  representing 
only  the  interests  of  the  stockholders,  to  the  government,  repre- 
sentino-  the  aggregate  interests  of  the  whole  people. 

"  It'^has  been  well  questioned  by  the  most  eminent  statesmen 
whether  a  currency  of  bank-notes,  issued  by  local  institutions  un- 
der State  laws,  is  not,  in  fact,  prohibited  by  the  National  Constitu- 
tion. Such  emissions  certainly  fall  within  the  spirit,  if  not  within 
the  letter,  of  the  Constitutional  prohibition  of  the  emission  of  "  bills 
of  credit "  by  the  States,  and  of  the  making  by  them  of  any  thing 
except  gold  and  silver  coin  a  legal  tender  in  payment  of  debts. 

»  However  this  may  be,  it  is  too  clear  to  be  reasonably  disputed 
that  Congress,  under  its  constitutional  powers  to  lay  taxes,  to 
regulate  commerce,  and  to  regulate  the  value  of  coin,  possesses 
ample  authority  to  control  the  credit  circulation  which  enters  so 
largely  into  the  transactions  of  commerce,  and  affects  in  so  many 
ways  the  value  of  coin.  In  the  judgment  of  the  Secretary,  the 
time  has  arrived  when  Congress  should  exercise  tliis  authority. 
The  value  of  the  existing  bank-note  circulation  depends  on  the  laws 
of  thirty-four  States,  and  the  character  of  some  sixteen  hundred 
private  corporations.  It  is  usually  furnished  in  greatest  propor- 
tions by  institutions  of  least  actual  capital :  circulation,  commonly, 
is  in  the  inverse  ratio  of  solvency.  Well-founded  institutions,  of 
large  and  solid  capital,  have,  in  general,  comparatively  little  circu- 
lation ;  while  weak  corporations  almost  invariably  seek  to  sustain 
themselves  by  obtaining  from  the  people  the  largest  possible  credit 
in  this  form.  ... 

"  The  Secretary  thinks  it  possible  to  combine  with  this  protection 
a  provision  for  circulation,  safe  to  the  community  and  convenient 
for  the  government. 

"  Two  plans  for  effecting  this  object  are  suggested.  The  first 
contemplates  the  gradual  withdrawal  from  circulation  of  the  notes 
of  private  corporations,  and  for  the  issue,  in  their  stead,  of  United 
States  notes,  payable  in  coin  on  demand,  in  amounts  sufficient  for 
the  useful  ends  of  a  representative  currency.  The  second  contem- 
plates the  preparation  and  delivery,  to  institutions  and  associations, 
of  notes  prepared  for  circulation  under  national  direction,  and  to 
be  secured  as  to  prompt  convertibility  into  coin  by  the  pledge  of 
United  States  bonds  and  other  needful  regulations. 

"  1.  The  first  of  these  plans  was  partially  adopted  at  the  last  ses- 
sion of  Congress,  in  the  provision  authorizing  the  Secretary  to  issue 
United  States  notes,  payable  in  coin,  to  an  amount  not  exceeding 
$50,000,000.  That  provision  may  be  so  extended  as  to  reach  tlie 
average  circulation  of  the  country,  while  a  moderate  tax,  gradually 
augmented,  on  bank-notes,  will  relieve  the  national  from  the  com- 
petition of  local  circulation.  It  has  been  already  suggested,  that 
the  substitution  of  a  National  for  a  State  currency,  upon  this  plan, 
would  be  equivalent  to  a  loan  to  the  government  without  interest, 
except  on  the  fund  to  be  kept  in  coin,  and  without  expense,  except 
the  cost  of  preparation,  issue,  and  redemption  ;  while  the  people 
would  gain  the  additional  advantage  of  a  uniform  currency,  and 


MR.  chase's  system  OF  NATIONAL  BANKS.  581 

relief  from  a  considerable  burden  in  the  form  of  interest  on  debt. 
These  advantages  are,  doubtless,  considerable  ;  and  if  a  scheme 
can  be  devised  by  which  such  a  circulation  will  be  certainly  and 
strictly  confined  to  the  real  needs  of  the  people,  and  kept  con- 
stantly equivalent  to  specie  by  prompt  and  certain  redemption  in 
coin,  it  will  hardly  fail  of  legislative  sanction.  .  .  . 

"  2.  The  second  plan  suggested  remains  for  examination.  Its 
principal  features  are  :  first,  a  circulation  of  notes  bearing  a  common 
impression,  and  authenticated  by  a  common  authority  ;  second,  the 
redemption  of  these  notes  by  the  associations  and  institutions  to 
which  they  may  be  delivered  for  issue ;  and,  third,  the  security  of 
that  redemption  by  the  pledge  of  United  States  stocks,  and  an 
adequate  provision  of  specie. 

"  In  this  plan,  the  people  in  their  ordinary  business  would  find 
the  advantages  of  uniformity  in  currency ;  of  uniformity  in  secu- 
rity ;  of  effectual  safeguard,  if  effectual  safeguard  is  possible,  against 
depreciation  ;  and  of  protection  from  losses  in  discounts  and  ex- 
changes :  while,  in  the  operations  of  the  government,  the  people 
would  find  the  further  advantages  of  a  large  demand  for  govern- 
ment securities ;  of  increased  facilities  for  obtaining  tlie  loans 
required  by  the  war ;  and  of  some  alleviation  of  the  burdens  on 
industry,  through  a  diminution  in  the  rate  of  interest,  or  a  partici- 
pation in  the  profit  of  circulation,  without  risking  the  perils  of  a 
great  money  monopoly. 

"  A  further  and  important  advantage  to  the  people  may  be  rea- 
sonably expected  in  the  increased  security  of  the  Union,  springing 
from  the  common  interest  in  its  preservation,  created  by  the  dis- 
tribution of  its  stocks  to  associations  throughout  the  country,  as  the 
basis  of  their  circulation, 

"  The  Secretary  entertains  the  opinion,  that,  if  a  credit  circulation 
in  any  form  be  desirable,  it  is  most  desirable  in  this.  The  notes 
thus  issued  and  secured  would,  in  his  judgment,  form  the  safest 
currency  which  this  country  has  ever  enjoyed  ;  while  their  receiv- 
ability  for  all  government  dues,  except  customs,  would  make  them, 
wherever  payable,  of  equal  value  as  a  currency  in  eveiy  part  of  the 
Union.  The  large  amount  of  sj^ecie  now  in  the  United  States, 
reaching  a  total  of  not  less  than  $275,000,000,  will  easily  support 
payments  of  duties  in  coin,  while  these  payments  and  ordinary  de- 
mands will  aid  in  retaining  this  specie  in  the  country  as  a  solid 
basis  both  of  circulation  and  loans. 

"  The  whole  circulation  of  the  country,  except  a  limited  amount 
of  foreign  coin,  would,  after  the  lapse  of  two  or  three  years,  bear 
the  impress  of  the  nation,  whether  in  coin  or  notes  ;  wliile  the 
amount  of  the  latter,  always  easily  ascertainable,  and,  of  course, 
always  generally  known,  would  not  be  likely  to  be  increased  beyond 
the  real  wants  of  business,  .  .  . 

"  It  only  remains  to  add  that  the  plan  is  recommended  by  one 
other  consideration,  which,  in  the  judgment  of  the  Secretary,  is 
entitled  to  much  influence.  It  avoids,  almost,  if  not  altogether, 
the  evils  of  a  great  and  sudden  change  in  the  currency,  by  offering 
inducements  to  solvent  existing  institutions  to  withdraw  the  circu- 


582      CUEKENCY   AND   BANKING   IN   THE   UNITED   STATES. 

lation  issued  under  State  authority  and  substitute  that  provided 
by  the  authority  of  the  Union.  Thus,  through  the  voluntary  action 
of  the  existing  institutions,  aided  by  wise  legislation,  the  great 
transition  from  a  currency  heterogeneous,  unequal,  and  unsafe,  to 
one  uniform,  equal,  and  safe,  may  be  speedily  and  almost  imper- 
ceptibly accomplished." 

It  may  be  replied,  to  invert  a  little  the  order  of  Mr.  Chase's 
statement,  that  it  never  "  has  been  well  questioned  by  the  most 
eminent  statesmen,  whether  a  currency  of  bank-notes,  issued 
by  local  institutions  under  State  laws,  is  not  in  fact  prohibited 
by  the  National  Constitution."  No  competent  authority  had 
ever  maintained  that  the  notes  of  a  State  Bank  are  the  "  bills 
of  credit "  contemplated  and  forbidden  by  the  Constitution  ; 
nor  has  any  one  worth  listening  to  ever  questioned  the  au- 
thority or  power  of  the  States  to  charter  Banks  for  the  purpose 
of  issuing  notes,  as  the  representatives  of  capital,  to  serve  as 
money.  Previous  to  the  formation  of  the  Constitution,  all  the 
States  had  issued  their  own  notes  to  serve  as  money.  Having 
no  capital,  these  were  termed  "  bills  of  credit."  Immediately 
upon  the  formation  of  the  Constitution,  and  before  the  United 
States  Bank  was  created,  Banks  were  chartered  by  the  several 
States,  without  a  suggestion  of  their  unconstitutionality  from 
any  quarter.  On  the  contrary,  it  was  claimed  by  the  strict 
constructionists,  in  the  debates  upon  the  bill  creating  the  first 
United  States  Bank,  that  the  right  to  charter  Banks  was  among 
those  reserved  to  the  States,  and  was  never  conferred  upon 
the  general  government.  Mr.  Chase's  assertion  was  not  only 
a  pure  fiction,  but  was  opposed  to  the  whole  experience  of  the 
country  and  the  theory  of  our  government.  It  might,  with  some 
reason,  be  claimed,  as  it  was  claimed,  that,  the  central  govern- 
ment having  no  express  authority  therefor,  the  power  to  create 
Banks  resided  only  in  the  States.  It  is  the  common  trick  with 
those  who  have  a  selfish  or  personal  scheme  on  foot  to  begin 
by  invoking  the  Constitution.  Underneath  this  covert  they 
stalk  for  game.  Jackson  appealed  to  the  Constitution  against 
the  creation  of  a  United  States  Bank,  and  in  favor  of  State 
Banks.  Mr.  Chase's  appeal  was  against  State  Banks,  and  in 
favor  of  United  States  Banks.  Between  the  two,  who  were 
simply  types  of  American  politicians,  the  country  has  had  no 
Constitution,  by  having  as  many  constructions  of  it  as  there 
were  demagogues  seeking  plunder  and  place.     Neither  does 


MR.    CHASE   ON   THE   STATE   BANKS.  583 

the  "  whole  circulation  of  Banks  constitute  a  loan,  without 
interest,  from  the  people  to  the  Banks,  costing  them  nothing 
except  the  expense  of  issue  and  redemption,  and  the  interest 
on  the  specie  kept  on  hand  for  the  latter  purpose."  Every 
issue  of  the  Banks,  to  be  convertible,  must  be  founded  on  solid 
capital ;  and,  if  they  make  more  than  the  ordinary  rates  of  in- 
terest, it  is  because  they  are  intrusted  with  large  sums,  for  safe 
keeping,  which  they  are  allowed  to  loan.  Every  borrower  at 
a  solvent  Bank  receives  the  command  and  use  of  capital  equal 
in  value  to  the  amount  of  his  loan.  Neither  did  "  the  value  of 
the  existing  bank-note  circulation  depend  on  the  laws  of  thirty- 
four  States,  and  the  character  of  some  sixteen  hundred  differ- 
ent corporations."  Its  value  was  almost  wdiolly  independent 
of  legislation.  It  is  probable  that,  at  the  date  of  Mr.  Chase's 
report,  the  currency  of  the  country  would  have  been  more 
valuable  than  it  was,  had  there  been  no  legislation  whatever  in 
reference  to  it.  A  currency  may  exist  as  well  without  legisla- 
tion as  may  any  method  employed  in  the  operations  of  produc- 
tion and  trade.  A  great  deal  more  harm  than  good  came  of  all 
the  safety -fund  systems.  Neither  is  it  true  that  "  the  greatest 
amount  of  circulation  is  furnished  by  the  weaker  Banks."  De- 
posits are  circulation  as  well  as  notes.  The  former  constitute 
the  circulation  and  means  of  strong  Banks.  If  amount  of 
circulation  be  evidence  of  weakness,  then  those  Banks  which 
Mr.  Chase  would  consider  to  be  the  strongest  are  the  weakest. 
A  "  credit  circulation  "  is  never  desirable,  nor  can  it  long  be 
maintained  unless  it  be  made  legal  tender.  When  a  suspen- 
sion takes  place,  the  public  will  for  a  time  use  the  notes  of 
the  suspended  Banks,  but  always  in  the  expectation  that  they 
will  speedily  resume.  The  moment  it  is  seen  that  they  will 
not  resume,  or  that  any  one  will  not,  its  notes  will  no  longer 
be  taken  as  money.  Mr.  Chase  had  not  the  trace  of  an  idea 
of  the  principles  upon  which  the  notes  of  Banks  circulate. 
He  assumed  that  they  would  remain  at  par,  the  capital  to 
redeem  them  being  locked  up  in  Washington.  He  might  as 
well  have  assumed  that  a  steamer  could  cross  the  Atlantic 
with  its  coal  locked  up  in  the  same  place.  Every  note  issued 
by  a  Bank  must,  to  maintain  itself  at  par,  be  convertible  into 
coin  or  its  equivalent,  at  the  will  of  the  holder.  The  power 
to  convert  on  demand  is  that  which  gives  it  value.  If  con- 
vertible in  terms  in  ten  years  from  date,  it  might  be  worth  50 


584      CURRENCY   AND   BANKING  IN  THE  UNITED  STATES. 

per  cent  of  its  nominal  value.  If  not  convertible  at  all,  and 
bearing  no  interest,  it  will  be  worth  nothing.  If  a  Bank  ac- 
cumulate a  sufficient  amount  of  means  to  carry  on  its  business 
in  addition  to  the  bonds  held  for  the  redemption  of  its  notes, 
it  may  treat  the  former  as  so  much  surplus  or  invested  capital, 
and  be  well  content  not  to  disturb  it.  Few  Banks,  however, 
can  afford  to  lock  up  an  amount  of  means  equal  to  their  circu- 
lation. When  called  upon  to  resume,  they  must  reclaim  their 
bonds,  or  wind  up  their  affairs.  It  is,  however,  after  the 
demonstrations  in  the  preceding  pages,  useless  to  reply  further 
to  Mr.  Chase.  Wholly  ignorant  of  the  laws  of  money,  his 
financial  policy,  like  that  of  General  Jackson,  was  simply  a 
means  of  securing  political  power.  Jackson  became  mighty 
and  famous  in  consequence  of  his  attack  upon  and  overthrow 
of  the  United  States  Bank.  Why  might  not  Mr.  Chase  be- 
come equally  so  b}^  overthrowing  the  State  Banks,  and  sub- 
stituting United  States  Banks  in  their  place?  Mr.  Chase, 
however,  while  attempting  a  similar  I'ole,  was  wholly  without 
those  qualities  which  enabled  General  Jackson  to  play  with 
such  success  upon  the  passions  and  prejudices  of  the  nation. 
He  did,  indeed,  succeed  in  breaking  up  the  State  Banks.  In 
face  of  the  chaos  which  was  threatened  by  the  secession  of  the 
South,  the  North  were  prepared  to  accept  almost  any  measure 
that  promised  to  unite  by  closer  ties  the  States  still  remaining 
faithful  to  the  government.  What,  at  first  sight,  could  seem 
better  calculated  to  this  end  than  a  uniform  currency,  sup- 
ported and  sustained  by  the  public  credit  ?  PI}' ing  with  such 
arguments  the  derelict  minds  of  the  members  of  Congress,  Mr. 
Chase  at  last  succeeded  in  carrying  his  scheme,  by  which 
associations  to  be  formed  under  general  laws  were  to  receive, 
upon  a  deposit  of  United  States  bonds,  notes  for  circulation, 
equalling  90  per  cent  of  the  nominal  value  of  the  former.  The 
new  Banks  were  required  to  hold  reserves  in  irredeemable 
United  States  notes,  equalling  25  per  cent  of  their  liabilities. 
Such  reserves,  however,  were  only  required  of  the  Banks  of 
the  leading  cities.  Those  of  country  banks  might  be  ver}' 
largely  made  up  of  the  notes  and  credits  of  the  former.  Specie 
was  carefully  and  thoroughly  eliminated  from  the  whole  sys- 
tem. The  notes  of  the  Banks  were  made  redeemable,  not  in 
coin,  not  in  that  which  had  a  higher  value,  but  in  that  which 
had  an  inferior  value  to  themselves.     This  is  the  reason  why 


THE   PKOPER   METHOD   OF   EESUilPTION.  585 

they  are  never  returned  for  redemption.  The  value  of  the 
notes  of  the  government  depends  solely  upon  its  will  or  solv- 
ency. They  may  never  be  paid.  In  such  case,  they  would 
be  utterly  worthless.  The  government  is  above  and  beyond 
law.  In  addition  to  the  bonds  which  the  Banks  put  up,  ex- 
ceeding their  circulation  10  per  cent  in  amount,  and  which 
now  command  a  high  premium,  they  hold  means  equal,  in 
theory  at  least,  to  the  amount  of  such  circulation ;  so  that, 
should  the  government  fail  to  pay  either  its  notes  or  bonds, 
the  holders  of  the  notes  of  the  Banks  would  receive  a  respect- 
able dividend. 

But  the  question  of  chief  concern  is  not  so  much  the  manner 
in  which  the  nation  got  into  its  present  dilemma,  as  how  it  is 
to  get  out  of  it.  Fortunately,  we  are  not  left  to  opinion  or 
sentiment  for  the  method.  We  can,  if  we  will,  have  demon- 
stration for  our  guide.  All  agree  that  paper  is  to  constitute  the 
greater  portion  of  the  currency,  both  for  the  government  and 
the  people;  and  that  this  paper  must,  at  all  times,  be  the 
equivalent  in  value  of  coin.  What  is  the  kind  of  paper  money 
that  is  always  the  equivalent  in  value  of  coin  ?  That  which 
can  be  converted  on  demand  into  coin,  or  into  merchandise 
of  the  value  of  coin.  It  is  plain  that  the  notes  of  a  govern- 
ment cannot  be  this  kind  of  money.  It  never  issues  notes 
or  symbols  as  instruments  for  the  loaning  of  capital,  but 
always  to  supply  the  lack  of  it.  No  government  possessed 
of  the  means  for  its  redemption  ever  thought  of  issuing 
paper  money.  When  it  could  not  borrow  by  contracting  to 
pay  interest,  it  issued  its  notes  without  interest;  making 
them  a  legal  tender,  by  means  of  which  they  have  a  high 
value  for  those  in  debt,  who,  by  the  rise  of  that  which  they 
possess,  consequent  on  their  issue,  can  get  them  at  a  price  far 
less  than  their  value  in  coin,  and  pay  them  away  at  the  value 
of  coin  :  in  other  words,  government  gets  its  notes  into  circu- 
lation by  helping  the  debtor  to  swindle  the  creditor  classes. 
The  retribution  comes  when  the  notes  are  to  be  paid. 

Until  governments  can  borrow  without  interest,  the  evi- 
dences of  their  indebtedness,  which  call  for  none,  will  always 
remain  at  a  discount,  no  matter  what  their  form.  Their  notes, 
payable  at  a  future  day,  without  interest,  can  never  equal  in 
value  a  similar  nominal   amount  of  capital  in  hand.     Such 


586      CURRENCY  AND   BANKING  IN  THE   UNITED   STATES. 

notes  must  be  wholly  demonetized ;  that  is,  must  cease  to  be 
currency  before  specie  payment  can  be  resumed.  We  are 
aware  that  the  public  will  reply  that,  "if  Banks  maintain 
large  amounts  of  notes  in  circulation,  holding  very  little  coin, 
why  cannot  governments  do  the  same  ?  Governments  can  do 
the  same  by  becoming  bankers,  and  discounting  bills  given  for 
merchandise.  Their  notes,  in  such  case,  will  circulate  as 
money ;  and  will  return  to  them,  provided  no  bad  loans  are 
made,  in  the  payment  of  their  bills.  It  is  not  the  gold  they 
hold  which  secures  the  return  and  convertibility  of  their  notes, 
but  the  merchandise  these  bills  represent.  Possessed  of  this 
in  sufficient  quantity,  their  notes  will  be  returned  to  them  for 
conversion  without  effort  on  their  part,  if  they  did  not  hold  a 
dollar  of  coin.  These  taken  in,  they  might  make  new  issues  ; 
wliich  would,  if  based  on  merchandise,  return  in  the  same  way 
fts  those  previously  put  in  circulation.  An  issue  of  currency 
by  Banks  and  bankers  is  always,  as  already  shown,  accompa- 
nied by  a  mutual  exchange  of  obligations,  —  of  those  of  the 
borrower,  that  he  will  pay  a  certain  sum  at  a  future  day,  for 
those  of  the  lender  or  issuer,  that  the  former  can  have  on 
demand  an  amount  of  coin  or  merchandise  equal  in  value  to 
the  notes  issued.  The  notes  are  the  instrument  by  which  the 
borrower  'secures  the  use  of  such  coin  or  merchandise.  He 
may  pay  his  bills  by  returning  to  the  Bank  the  obligations 
issued  by  it,  in  which  case  those  created  on  either  side  are 
mutually  discharged  ;  or  in  coin,  with  which  the  Bank  will 
discharge  its  notes  which  have  fallen  into  other  hands.  When 
a  government  issues  a  currency,  no  such  proceedings  take 
place  :  it  alone  contracts  to  retire  it.  When  Banks  issue  a 
currency,  the  receiver  as  well  as  the  issuer  contracts  to  provide 
the  means  for  its  redemption.  The  wide  difference  in  the 
modes  of  issue  of  the  two  currencies  will  show  their  difference 
in  kind.  Unless  governments  are  at  all  times  prepared  to 
discharge  their  obligations  in  the  same  way  that  those  of 
bankers  are  discharged,  they  can  never  issue  one  of  the  kind 
that  the  nation  is  now  seeking  to  establish. 

Governments  are  not  to  turn  bankers  by  discountilig  bills 
and  providing  adequate  reserves  for  the  discharge  of  their 
liabilities.  Mr.  Chase  attempted  the  role  of  a  banker,  without 
any  provision  for  his  issues ;  and  soon  found  himself  broken, 
with  the  whole  government  at  his  back.     He  had  outstand- 


GOVERNMENT  NOTES  ALWAYS   AT   A  DISCOUNT.        587 

ing,  when  he  suspended,  -$33,460,000  of  notes,  which  immedi- 
ately fell  to  a  discount  for  gold,  although  equally  receivable 
with  it  in  the  payment  of  the  revenues.  Why  did  they  fall  to 
a  discount  ?  Simply  for  the  reason  that  they  could  be  used  at 
their  face  for  one  purpose  only,  —  the  payment  of  the  rev- 
enues. Those  to  whom  they  might  be  offered  who  had  other 
uses  for  their  money  would  not  pay  the  par  of  coin  for  that 
which  would  not  serve  them  in  its  place.  If  they  wanted  the 
latter,  the  only  way  to  get  it  would  be  to  sell,  in  the  open 
market,  for  what  they  would  bring,  the  notes  they  might  hold 
or  receive.  Such  a  process  would  of  itself  involve  an  incon- 
venience which  would  reduce  their  value  below  that  of  coin. 
Those  first  issued  got  into  circulation  only  for  the  reason  that 
they  were  supposed  to  be  convertible  into  coin.  So  soon  as 
this  could  not  be  had  for  them,  they  were  reduced  in  value 
by  being  restricted  to  one  use.  They  did  not  fall  very  largely 
in  price,  for  the  reason  that  it  was  seen  that  they  would  speed- 
ily be  taken  in  in  the  payment  of  the  revenues.  No  more 
of  the  kind  were  attempted  to  be  issued,  for  the  reason  that 
government  had  no  means  for  their  payment.  To  attempt  the 
issue  of  notes  payable  on  demand,  without  any  provision  of 
means  therefor,  would  be  to  break  down  its  credit  altogether. 
Hence  the  issue  of  legal-tender  notes,  wliich  had  a  competency 
(which  plain  notes  did  not  have)  of  discharging  contracts. 
By  virtue  of  this  attribute  they  would  serve  as  money,  at  some 
value,  in  almost  unlimited  amounts.  Although  they  had  a 
competency  to  discharge  contracts,  which  plain  notes  had  not, 
they  fell,  after  they  had  been  issued  in  considerable  sums,  to 
prices  far  below  those  which  the  plain  notes  commanded ;  for 
the  reason  that  definite  provision  was  made  for  the  retirement 
of  the  latter,  while  no  such  provision  was  made  for  the  former. 
The  value  of  one  could  be  pretty  accurately  estimated  ;  that  of 
the  other  was  a  mere  matter  of  conjecture.  So  long  as  it  is 
believed  that  the  notes  will  be  paid,  the  legal -tender  clause 
adds  to  their  value.  When  it  is  believed  that  they  will  not  be 
paid,  no  one  will  contract  to  receive  them,  although  creditors 
may  be  still  compelled  to  do  so  after  they  become  wholly 
valueless.  As  they  can  never  serve  all  the  uses  of  coin,  they 
can  never  have  its  value  until  they  are  actually  exchangeable 
therefor.  To  resume,  therefore,  the  government  must  be  pre- 
pared to  take  in,  and  must  take  in  and  retire  permanently,  all  its 


688      CURRENCY  AND   BANKING   IN   THE   UNITED   STATES. 

notes  now  circulating  as  money.  Till  such  provision  be  made, 
they  will  remain  at  a  discount.  This  proposition  is  as  demon- 
strable as  that  an  acute  angle  cannot  equal  a  right  angle. 

The  demand  notes  first  issued  by  Mr.  Chase,  after  their  dis- 
honor were  only  at  a  small  discount,  for  the  reason  that  they 
were  receivable  in  payment  of  the  revenues.     Now,  assuming 
that   those   annually  collected    in   the    United    States   equal 
1300,000,000,  should  the  government  issue*  its   notes  receiv- 
able in  their  payment,  without  interest,  it  is  probable  that  at 
least  $100,000,000  of  these  would  at  all  times  be  outstanding, 
and  in  the  hands  of  the  public  for  the  purposes  they  would 
serve.     These  notes  would  be  current  as  money,  at  a  discount 
equalling  the  interest  that  would  accrue,  at  a  low  rate,  on 
their  amounts,  from  the  time  of  their  issue  till   they  were 
returned  to  the  Treasury.     If  they  bore  an  interest  at  the  rate 
of,  say  2  per  cent,  they  would  circulate  as  money  at  their  par 
value.     In  this  way,  and  in  this  way  only,  might  a  government 
issue  a  convertible  currency ;  which,  except  in  extraordinary 
emergencies,  would  be  maintained  at  the  par  of  coin.     As  the 
proper  constituent  for  its  retirement  would  be  provided,  it 
would  exert  no  effect  to  inflate  prices.     The  objection  to  such 
a  currency  would  be  the  constant  liability  to  its  excessive  issue. 
Its  proper  amount  would  soon  come  to  be  measured  by  the 
necessities  of  government.     This  of  itself  is  sufficient  reason 
against  its  use.     Another  reason,  not  so  conclusive,  but  still 
sufficiently  so,  is  that  by  the  use  of  its  notes  bearing  no  inter- 
est, government  could  not,  on  their  issue,  reaUze  their   par 
value ;  while,  if  they  bore  interest,  it  could  not  get  them  in  at 
their  par  value.     In  either  case,  the  notes  would  be  in  the 
nature  of  a  loan,  upon  which  interest  would  have  to  be  paid, 
either  directly,  or  by  selling  them  below  their  face.     The  ordi- 
nary operations  of  government  should  never  be  carried  on  by 
borrowing,  but  by  capital  in  hand,  or  the  symbol  of  capital. 
They  should,  in  great  measure,  be  carried  on  by  the  latter, 
precisely  as  the  ordinary  operations  of  society  are  carried  on, 
for  the  purpose  of  allowing  gold  and  silver  to  serve  as  reserves 
rather  than  as  currency. 

Payments  abroad,  as  far  as  the  government  was  concerned, 
would,  even  if  the  country  were  on  a  specie  basis,  be  made  by 
the  use  of  symbols  rather  than  of  coin.     It  would  make  its 


A  UNITED   STATES  BANK  MUST   BE  CREATED.  589 

remittances  in  bills,  leaving  it  to  the  drawers  to  send  forward 
their  proper  constituent.  To  meet  them,  it  might  not  be  neces- 
sary to  send  forward  a  dollar  of  coin.  If  this  were  required 
at  all,  it  would  only  be  to  make  good  any  balance  growing  out 
of  the  ordinary  operations  of  trade.  All  such  balances  must, 
in  the  long  run,  be  paid  in  merchandise  by  countries  that  are 
not  producers  of  the  precious  metals.  This  country,  as  it  is 
a  producer,  would,  after  resumption,  be  a  large  exporter  of 
them  as  merchandise.  Even  in  such  case,  government  would 
never  become  the  direct  exporter  of  them.  In  the  purchase 
of  bills,  the  notes  and  credits  of  a  specie-paying  Bank  would 
serve  to  it  all  the  uses  of  coin  ;  and,  from  their  greater  con- 
venience, would  be  preferred  thereto,  precisely  for  the  reason 
that  they  are  preferred  to  coin  by  the  commercial  public.  The 
sellers  of  bills,  producers  of  merchandise,  would  prefer,  for 
their  own  convenience,  to  be  paid  in  symbols  rather  than  coin. 
With  very  large  payments  to  be  nominally  made  in  it,  years 
might  elapse  without  the  export  of  a  dollar  of  it.  When  the 
work  of  redemption  is  fairly  entered  upon,  this  country  will 
for  some  time  be  a  large  importer  of  coin  from  the  very 
countries  to  which  it  is  now  most  indebted.  These  will  not 
only  be  wholly  paid  in  merchandise,  but  they  will  be  com- 
pelled to  send  us  large  amounts  of  coin,  in  discharge  of  the 
balances  arising  against  them  in  the  course  of  trade.  Ours 
will  then,  for  a  time,  become  the  creditor  instead  of  the  debtor 
nation.  Resumption  is  to  inaugurate  an  era  of  economy ;  an 
excess  of  exports  of  merchandise  over  imports  ;  a  "  balance  of 
trade  "  in  our  favor,  to  be  paid  in  coin.  If  government  can 
discharge  all  foreign  obligations  by  the  use  of  symbols,  still 
better  can  it  discharge  by  their  use  all  domestic  ones. 

A  currency  of  the  kind  described  must  be  issued  by  Banks, 
or  a  Bank.  Private  bankers,  no  matter  the  extent  of  their 
means,  and  however  competent  they  might  be  to  issue  a  cur- 
rency, could  not  give  sufficient  guarantees  for  its  uniformity 
and  stability,  nor  could  they  perform  for  government  all  the 
duties  required  in  its  operations.  The  Bank  whose  currency 
government  is  to  use  should  be  created  by  it,  that  it  may  be 
in  a  position  to  impose  and  enforce  conditions  necessary  to  its 
own  protection  as  well  as  to  that  of  the  public.  Such  currency 
could  not   be  furnished  by  Banks  generally,  for  the  reason 


590      CUERENCT   AND    BANKING   IN  THE   UNITED   STATES. 

that  conditions  necessary  to  be  imposed  would  be  too  onerous 
to  be  borne  by  them,  and  could  be  borne  only  by  the  Bank 
which  was  to  become  the  depository  of  the  revenues  of  the 
government,  and  which,  for  this  reason,  would  attract  to  itself 
very  large  deposits  from  the  commercial  and  mercantile  classes. 
The  Bank  to  be  created  should  be  required  to  deposit  with 
the  government  the  bonds  of  the  latter,  to  the  extent  of  at 
least  $100,000,000  (with  provision,  if  proper,  for  their  in- 
crease), the  interest  of  which  should  not  exceed  3|  per  cent, 
as  security  for  the  public  deposits,  and  as  ultimate  security  for 
its  creditors.  It  should  be  required  to  establish  branches  in 
every  State  in  the  Union,  and  in  every  city  having  a  popula- 
tion exceeding  50,000;  and  to  transfer,  without  charge,  the 
public  revenues  from  place  to  place.  In  providing  for  its 
capital,  the  Banks,  wherever  the  parent  Bank  or  a  branch  was 
to  be  established,  should  for  this  purpose  be  allowed  to  com- 
bine their  own  capitals.  In  this  way,  that  for  a  National  Bank 
might  be  provided,  without  any  increase  for  the  country,  and 
without  supplanting  or  invading  the  rights  of  those  already 
in  existence.  Assuming  the  coin  in  the  National  Treasury  to 
equal  $100,000,000,  this  sum,  transferred  to  the  Bank,  would 
form  adequate  reserves  for  an  issue  of  convertible  currency 
the  amount  of  $300,000,000,  as  at  least  one-third  that  sum 
would  be  maintained  in  circuhation  in  the  collection  and  dis- 
bursements of  the  revenues.  For  such  an  amount  of  notes, 
only  a  small  amount  of  reserves  would  be  required.  A  panic 
in  Great  Britain  has  no  tendency  to  send  home  the  notes  of 
the  Bank  of  England  for  coin  ;  nor  would  it,  in  this  country, 
have  a  tendenc}'-  to  send  home  the  notes  of  a  Bank  receiv- 
able in  the  revenues  ;  for,  whether  valuable  or  not,  they  would 
always  in  the  end  serve  to  the  holders  in  the  place  of  coin. 
That  transferred  to  the  Bank,  consequently,  could  be  made 
the  basis  for  an  issue,  in  addition  to  that  required  in  the  oper- 
ations of  the  government,  of  $200,000,000  of  convertible  notes, 
to  serve  for  the  purposes  of  production  and  trade.  In  this 
way  the  government  could  immediately  place  itself  on  a  specie 
basis,  as  could  individuals  who  had  sufficient  means  therefor. 
The  Bank  would  at  once  become  the  depository  of  all  the 
specie  in  the  country,  and  whatever  was  imported,  or  produced 
from  the  mines :  so  that  its  means  of  making  loans  upon 
a  specie  basis  would  undoubtedly  increase  much  faster  than 


A  UNITED   STATES   BANK   TO   BE   CREATED.  591 

suitable  paper  could  be  found  for  discount.  Eveiy  person 
that  was  able  to  resume  would  open  an  account  with  it,  and 
would  conduct  his  operations  in  the  currency  issued  by  it ; 
and  this  process,  like  all  healthy  and  natural  ones,  would  stead- 
ily gain  strength  till  all  unhealthy  and  unnatural  ones  were 
completely  superseded. 

But  provision  for  resumption,  and  the  creation  of  a  currency 
by  means  of  which  the  operations  of  the  government,  and  in 
time  those  of  the  whole  country,  could  be  carried  on,  would 
be  by  no  means  the  only  or  chief  advantage  resulting  from  a 
Bank  of  the  United  States.  No  matter  the  extent  of  its 
operations,  the  greater  part  of  the  currency  is  always  to  be 
furnished  by  other  and  local  institutions.  To  render  a  cur- 
rency furnished  by  such  safe  and  adequate  to  the  wants  of 
the  countr}'^,  provision  must  be  made  for  the  constant  redemp- 
tion of  their  issues.  The  tendency  of  money  of  every  kind  is 
always  to  the  centres  of  capital  and  trade.  When,  however, 
the  notes  and  credits  of  Banks  are  issued  in  the  discount  of 
bills  representing  merchandise,  they  will  as  a  rule  remain  in 
circulation  till  they  have  served  for  its  distribution.  Where 
issues  are  made  on  accommodation  paper,  these,  having  no 
proper  constituent  for  their  employment,  tend  immediately 
toward  the  commercial  centres.  The  tendency  of  all  the  issues 
of  the  New  England  States  was  constantly  toward  Boston. 
With  daily  redemptions  in  that  city,  of  all  the  Banks  within 
the  territory  dependent  upon  it,  there  could  be  no  considerable 
excess  of  issue  by  any  Bank,  as  such  excess  had  to  be  taken 
in  almost  as  soon  as  it  was  made.  By  the  system  peculiar  to 
that  section  of  the  country,  and  which  has  already  been  de- 
scribed, a  currency  uniform  in  quantity  and  value,  or  one 
reflecting  the  means  and  wants  of  the  people,  was  secured. 
This  system,  which  was  purely  voluntary,  and  which  imposed 
upon  all  the  members  to  it  the  duty  of  redeeming  their  notes 
at  their  own  cost,  at  the  point  to  wliich  they  constantly  tended 
to  flow,  never  obtained  in  any  other  part  of  the  country, 
chiefly  for  the  reason  that  no  other  section  formed  such  a  com- 
plete geographical  and  commercial  unit.  By  means  of  the 
United  States  Bank  and  its  branches,  and  by  these  alone, 
will  a  similar  system,  or  rather  series  of  systems  with  similar 
results,  be  formed  for  the  whole  country.     A  branch  of  this 


592      CUEEENCY  AND   BANKING  IN  THE   UNITED   STATES. 

Bank  established  at  Chicago  would,  as  a  means  of  increasing 
its  loanable  capital  and  its  business,  receive  in  payment  of  its 
bills,  and  on  deposit,  the  notes  and  credits  of  all  solvent  specie- 
paying  Banks  within  the  territory  of  which  that  city  is  the 
commercial  centre.    It  would,  however,  require  all  such  Banks, 
whose  notes  and  credits  it  received,  to  make  them  "good," 
daily,  at  its  own  counter.     It  would  be  equally  for  the  interest 
of  all  solvent  Banks  to  make  such  an  arrangement,  as  a  means 
of  securing  for  their  notes  and  credits  the  widest  circulation. 
A  good  reputation  would  do  for  them  what  it  does  for  a  mer- 
chant ;  and  they  would,  as  a  rule,  seek  to  deserve  it.     The 
managers  of  Banks,  if  they  are  not  influenced  by  higher  mo- 
tives, are  subject  to  much  fewer  temptations  than  merchants  to 
deviate  from  their  proper  path.     By  means  of  a  United  States 
Bank  and  branches,  the  system  of  redemption  which  so  long 
prevailed  in  the  New  England  States  would,  as  far  as  specie 
payments  were  resumed,  be  created  for  the  whole  country,  and 
would  be  enforced  by  the  most  potent  of  all  laws,  —  that  of  self- 
interest.     If  the  notes  of  a  Bank  in  Minnesota,  for  example, 
were  "good"  at  the  branch  Bank  in  Chicago,  they  would  be 
equally  so  in  every  other  part  of  the  country,  less  the  rate  of 
exchange  between  that  city  and  the  point  at  which  they  might 
be  offered  ;  or  they  might  have  a  higher  value  than  coin  in 
certain  sections  from  which  remittances  to  that  city  were  to 
be  made.     A  branch  at  Louisville  would,  in  the  same  way, 
receive  the  notes  and  credits  of  all  the  Banks  in  good  stand- 
ing within  the  territory  dependent  upon  that  city  ;  imposing, 
however,  the  conditions  described.    Another  system  of  redemp- 
tion would  thus  be  created  for  another  and  important  section 
of  the  country.     These  systems  woidd  be  repeated,  so  as  to 
apply  to  every  portion  of  it.     Wherever  a  branch  was  estab- 
lished, the  local   Banks  would   be  forced  to  come  up  to  its 
standard ;  and  as  the  notes  and  credits  of  the  Bank  and  its 
branches,  less  in  each  case  the  rate  of  exchange,  would  be  of 
uniform  value  throughout  the  country,  the  notes  and  credits 
of  all  the  Banks  in  good  standing  within  it  would  everywhere 
possess  a  similar  value.     A  safe,  homogeneous  and  convertible 
currency  would  thus  be  created  by  the  operation,  as  it  were, 
of  natural  laws.     Its  use,  like  that  of  bills  of  exchange,  would 
necessarily  involve  occasional  losses ;  but  such  losses  are  no 
argument  against  the  use.     The  possibility  of  loss,  in  every 


A  UNITED  STATES  BANK  TO  BE  CKEATED.      593 

operation  or  investment,  would  teach  the  necessity  of  provid- 
ing every  safeguard  against  it.  The  great  danger  in  the  mat- 
ter of  currency  is  that  such  safeguards  will  not  be  provided. 
A  notice  by  the  Suffolk  Bank,  while  that  system  was  in  oper- 
ation, that  the  notes  and  credits  of  any  Bank  were  "  not  good  " 
at  its  counter,  was  always  received  by  the  public  as  a  valuable 
warning.  Experience  proved  that  in  almost  every  case  it  was 
not  seasonably  given  ;  not  from  the  fault  of  the  Bank,  but  for 
the  reason  that  every  one  redeeming  at  it  would  naturally 
make  every  sacrifice  to  prevent  an  exposure  of  its  own  affairs. 
There  never  was  a  charge  made  against  the  former  that  it 
ever  acted  in  any  case  from  improper  motives,  or  unadvisedly. 
Never  was  there  a  well-founded  charge  made  against  either 
Bank  of  the  United  States  that  it  treated  any  Bank  otherwise 
than  with  the  greatest  forbearance  and  consideration.  If  it 
erred  at  all,  it  always  erred  on  the  side  of  too  great  leniency. 
Every  Bank  should  be  held  to  the  strictest  account.  No  in- 
justice can  be  done  it  in  compelling  it  to  make  all  its  issues 
the  equivalent  of  coin.  The  public,  who  are  the  holders  of  the 
greater  part  of  its  notes  and  credits,  have  no  means  of  deter- 
mining their  value.  «  Hence  the  importance  of  a  system  which 
shall  disclose,  at  the  earliest  moment,  the  weakness  or  im- 
proper conduct  of  every  issuer  of  currency.  No  injustice  can 
be  done  a  Bank,  should  all  its  liabilities  be  demanded  for  im- 
mediate payment.  It  contracts  to  pay  them  all  on  demand. 
They  will  not  be  presented  for  immediate  payment  so  long  as 
its  loans  are  properly  made.  No  Bank  will  collect  the  notes 
and  credits  of  another  Bank,  for  the  purpose  of  making  a  run 
upon  it,  and  thereby  injuring  its  credit,  as  it  would  be  liable 
to  create  in  this  way  distrust  and  disturbance  which  might 
weaken  its  own  position,  its  own  liabilities  being  always  pay- 
able on  demand.  As  it  is  for  the  interest  of  merchants  to  deal 
fairly  with  their  customers  and  the  public,  as  the  best  means 
of  promoting  their  own  welfare,  so  it  is  for  the  interest  of  Banks 
to  treat  each  other  in  a  similar  manner.  Their  interest  be- 
comes the  rule  of  their  conduct ;  and  this  interest  always 
coincides  with  duty. 

It  is  needless  to  remark  that  the  results  predicated  of  an 
United  States  Bank  to  be  created  are  precisely  those  which 
followed  the  establishment  of  the  second  Bank  in  1816.  The 
nation  then  was  in  a  desperate  condition  in  reference  to  its 

38 


594     CURRENCY  a:n-d  banking  in  the  united  states. 

currency,  and  was  restored  mainly  through  the  instrumentality 
of  the  Bank,  by  methods  which  have  been  fully  set  forth  in 
the  extracts  given  from  Mr.  McDuffie's  Report  of  1832. 

Adequate  provision  for  the  future  having  been  made,  so 
that  government,  and  indi^dduals  as  far  as  they  are  able,  can 
conduct  their  operations  upon  a  specie  basis,  the  next  question 
is  the  mode  of  getting  rid  of  our  present  inconvertible  currency. 
That  having  relation  to  the  government  notes  can  be  easily 
disposed  of.  The  only  provision  to  be  made  for  their  retirement 
is  to  fund  them  at  a  low  rate  of  interest.  That  done,  the  duty 
of  government  will  be  at  an  end.  They  are  to  be  wholly  and 
finally  retired.  The  degree  of  rapidity  of  their  retirement  is  to 
be  left  with  their  holders.  With  provision  for  funding  them, 
the  notes  should  be  demonetized,  except  in  the  discharge  of  con- 
tracts entered  into  in  them.  In  their  retirement  not  a  dollar 
of  coin  should  be  used.  If  the  notes,  as  is  so  generally  claimed, 
be  good  money,  they  will  continue  to  circulate  as  money.  If 
not,  it  will  be  for  the  interest  of  their  holders  to 'get  rid  of 
them  as  soon  as  possible.  As  they  will  have  a  great  deal  of 
work  to  do  in  discharging  the  contracts  that  are  still  outstand- 
ing, they  will  be  funded  only  in  an  easy  state  of  the  money 
market,  and  when  no  embarrassment  would  be  created  thereby. 
It  would  be  a  great  misfortune  to  have  resumption  proceed 
too  rapidly  at  the  outset.  The  retirement  of  the  notes  will 
create  the  least  disturbance  when  their  holders  are  left  to  act 
as  their  interest  may  dictate.  The  process  will  be  a  healthy, 
for  the  reason  that  it  will  be  a  natural  one.  Taken  in  con- 
nection with  the  provision  of  a  Bank,  it  will  be  a  most  rapid 
one,  for  the  reason  that  a  new  currency  will  constantly  be 
provided  to  take  the  place  of  the  old.  The  old  will  disappear 
so  soon  as  the  new  can  be  created.  Nothing  could  be  more 
absurd  than  for  government  to  attempt  to  pay  off  its  notes  in 
coin.  This  would  involve  the  emplo3'ment  of  a  cumbersome 
and  expensive  machinery  to  effect  that  which  could  be  accom- 
plished far  more  easily  without  than  with  it.  To  pay  off  the 
notes  in  coin,  government  would  be  compelled  to  provide  a 
sum  equal  to  a  million  dollars  in  coin,  weekly,  for  a  period  of 
more  than  seven  years.  No  provision  for  a  new  currency  hav- 
ing been  made,  it  could  proceed  only  a  few  weeks  in  this  direc- 
tion without  creating  the  greatest  alarm  and  embarrassment. 


UNITED   STATES   NOTES   TO   BE   DEMONETIZED.  595 

The  plan  proposed  by  government  is  as  if  an  army  should  burn 
all  its  ships,  and  all  the  material  neeessar}'^  to  build  new  ones, 
before  attempting  to  cross  a  river  that  obstructs  its  way.  It 
imagines,  in  fact,  that  it  has  no  river  to  cross  ;  that  resumption 
is  a  mere  ceremony,  not  a  radical  revolution  in  the  monetary 
system  of  the  countr}^  Were  the  method  it  proposes  practi- 
cable, the  time  required  for  its  accomplishment  would  be  a 
sufficient  reason  against  its  adoption.  Instead  of  a  little  more 
than  one  year  within  which  resumption  is  now  to  be  had,  ten 
years  would  not  suffice  ;  while  the  country  would  suffer  more 
in  the  process  of  resumption  in  coin,  than  it  has  suffered  from 
the  first  issue  of  the  notes  to  the  present  time.  The  plan  pro- 
posed is  as  unjust  as  it  is  impracticable.  No  one  has  paid 
coin,  or  their  value  in  coin,  for  the  notes.  Why  should  the 
holders  receive  more  than  their  value  in  coin  ?  If  they  are 
paid  in  it,  who  are  to  be  its  fortunate  receivers  ?  Only  a  small 
amount  can  be  paid  off  at  any  one  time.  The  coin  paid  out 
would  not  go  into  circulation,  for  the  reason  that  the  notes 
remaining  outstanding  would  still  be  at  a  discount.  Whoever 
received  the  coin  for  them  would  immediately  sell  it,  as  do 
the  Banks  at  the  present  time,  in  order  to  make  the  premium. 
The  attempt  to  retire  the  notes  by  payment  in  coin  would  be 
worse  than  the  labor  of  Sisyphus.  If  the  government  were  to 
announce  that  it  would  immediately  begin  the  payment  of  its 
notes  in  gold,  at  the  rate  of  a  million  dollars  in  a  week,  and 
that  it  would  continue  such  payments  for  three  hundred  and 
sixty  weeks  consecutively,  that  is,  until  the  whole  were 
taken  in,  they  would  fall  to  a  discount 'far  greater  than  that 
at  present  existing.  Their  value  could  then  be  prett}'  accu- 
rately estimated,  and  they  would  only  command  their  value. 
If  the  whole  were  to  be  retired  within  an  average  period  of 
three  and  a  quarter  years,  they  would  probably  fall  to  a  dis- 
count of  twenty-two,  instead  of  six  or  seven  per  cent.  The 
impression  now  prevails  that  they  are  to  be  retired  by  the  first 
day  of  January,  1879.  It  is  this  idea  that  controls  their  pres- 
ent price.  They  can  no  more  be  retired  by  payment  in  coin, 
or  brought  to  their  par  value  by  1879,  than  the  waters  of  Lake 
Superior  can  before  that  time  be  pumped  into  the  ocean.  The 
exact  period  of  resumption  can  no  more  be  foretold  than  can 
the  state  of  the  weather  on  the  first  day  of  January,  1879. 
Nothing  but  mischief  can  come  from  fixing  a  certain  day  upon 


596      CURRENCY  AND   BANKING  IN  THE   UNITED    STATES. 

which  the  event  is  to  take  place,  especially  when  every  step 
now  taken  tends  to  postpone  instead  of  to  advance  it.  When 
every  thing  is  done  that  can  be  done  by  way  of  preparation, 
the  nation  must  quietly  await  the  event. 

Provision  having  been  made  for  the  creation,  by  a  Bank,  of 
a  convertible  currency,  to  serve  as  well  in  production  and 
trade  as  in   the  operations  of  the   government,  and   for  the 
demonetization  of  the  legal-tender  notes,  the  next  step  to  be 
taken  is  the  repeal  of  the  law  imposing  a  tax  upon  the  notes 
of    State   Banks.      That  step   taken,   such   of  the   latter   as 
were  able  would  immediately  begin  the  issue  of  convertible 
currency.     There   are  now  some  six  hundred  of  these  insti- 
tutions  in   existence   in   the    country,    having   an    aggregate 
capital  of  $80,000,000 ;  loans  and  discounts  to  the  amount  of 
$178,000,000  ;  and   deposits  to  the  amount  of  $158,000,000. 
Among  these  are  some  of  the  strongest  Banks  in  the  country. 
Their  means,  whatever  they  are,  are  in  hand,  not  (like  those 
of  most  of  the  National  Banks)  tied  up  in  Washington     They 
wovild  be  compelled  to  issue  convertible  notes,  or  none  at  all. 
The  public  will  never  take  an  inconvertible  currency  when  they 
can  get  a  convertible  one  ;  and  tliis  they  could  get  in  the  notes 
and  credits  of  the  United  States  Bank.     To  issue  a  currency, 
the  State  Banks  would  have  to  provide  reserves  in  coin,  as  it 
is  assumed   that  the  United  States  legal-tender  notes  have 
been  demonetized.     The  tax  on  their  notes  being  removed, 
great    numbers  of  the   National   Banks   would    immediately 
reorganize  themselves  as  local  or  State  institutions.     Such  as 
had  no  considerable  part  of  their  means  in  governments  could 
very  speedily  become  the  issuers  of  notes  for  circulation.     They 
could,  for  the  reasons  stated,  issue  no  other  than  convertible 
ones.     Resumption   by  the   National   Banks  which   received 
their  full  quota  of  notes  would  necessarily  be  a  much  more 
gradual  process,  unless  government  should  consent  to  return 
to  any  Bank  its  bonds,  upon  the  deposit  of  a  corresponding 
amount  of  National  bank-notes  which  might  not  be  its  own. 
Government  could  compel  the  various  Banks  to  redeem  their 
notes  so  returned  in  its  own  notes,  to  be  cancelled  if  advis- 
able.    As  the  Banks  in  receiving  their  securities  would  pres- 
ently, as  State  institutions,  become  the  issuers  of  money,  no 
great  or  necessary  stringency  would  result  from  the  retire- 


CONDITIONS   OF   RESUMPTION.  597 

ment  of  one  kind  of  currency,  as  it  would  speedil}'-  be  followed 
by  the  issue  of  another.  The  return  of  their  bonds  would 
enable  them  to  provide  coin  reserves,  far  exceeding  in  amount 
any  that  would  be  required  in  their  operations.  The  bonds 
held  as  security  for  their  notes,  equalled,  according  to  the  last 
annual  report  of  the  Comptroller  of  the  Currency,  the  sum 
of  $337,170,400.  There  were  held  by  them,  in  addition,  at 
the  same  time,  securities  of  the  United  States  to  the  amount  of 
847,840,150  ;  the  total  amount  equalling  nearly  $400,000,000. 
The  coin  value  of  their  securities  largely  exceeded  that 
sum. 

Assuming  the  Banks  to  resume  with  total  liabilities  of 
$800,000,000,  and  that  they  should  hold  at  the  time,  in  coin, 
a  sum  equalling  25  per  cent  of  this  amount,  one-half  their 
government  securities  would  provide  all  the  reserves  required. 
Why  should  they  not  be  allowed  to  become  possessed  of  their 
capital  as  fast  as  it  can  be  reclaimed,  even  if  they  remain 
national  institutions  ?  As  it  is,  not  a  dollar  of  the  whole 
$400,000,000,  or  at  least  of  that  portion  of  it  held  for  their 
circulation,  is  available  as  banking  capital !  The  Banks  can- 
not resume,  for  the  reason  that  that  which  is  to  enable  them 
to  do  so  is  out  of  their  possession,  and  must  always  be  so,  so 
long  as  they  issue  notes.  As  long  as  they  are  deprived  of  it, 
they  must  remain  at  a  dead  lock,  so  far  as  resumption  is  con- 
cerned. But  if  the  present  system  be  abolished,  what,  it  is 
inquired,  is  to  become  of  the  people,  —  the  poor,  ignorant,  and 
innocent  note-holders  ?  What  has  become  of  them  for  the 
past  fifteen  years,  and  what  has  been  the  result  of  the  paternal 
action  of  government  during  the  whole  of  this  period  ?  Dur- 
ing the  whole  of  it,  their  measure  of  value  and  instrument  of 
exchange  has  fluctuated  all  the  way  from  thirty-five  to  ninety- 
five  per  cent  of  its  par  value  ;  in  consequence  of  which,  all 
ideas  of  relation  of  cost  to  value  have  been  well  nigh  lost, 
and  all  the  operations  of  society  brought,  as  it  were,  to  a  dead 
stand.  Would  the  people,  could  the}'  have  had  their  own  way, 
have  for  fifteen  long  years  put  up  with  the  currency  which 
has  been  imposed  upon  them  ?  With  Banks  alone  to  furnish 
it,  it  is  impossible  that  an  inconvertible  currency  should  long 
remain  in  circulation.  Strong  Banks  will  alwaj^s  be  speedily 
compelled  to  resume ;  weak  ones,  to  go  out  of  existence. 
Government  officials  are  certainly,  of  all  parties,  the  last  to  be 


598      CUEEENCY   AND   BANKING  IN   THE   UNITED   STATES. 

intrusted  with  the  direction  of  the  business  operations  of  the 
country.  Who,  but  these,  brought  her  into  her  present  dilem- 
ma ?  The  beauty  and  excellence  of  Mr.  Chase's  measures  have 
been  their  theme  from  their  adoption  to  the  present  time. 
They  successively  repeat  the  same  story,  parrot-like,  from  year 
to  year.  Their  iterations,  however  absurd  they  may  be,  tend  to 
confirm  the  general  delusion.  Would  the  people,  left  to  them- 
selves, make  use  of  weights  or  measures  to  be  selected  by  lot 
or  chance ;  no  two  of  which*,  though  nominally  the  same,  were 
alike  ;  and  which  could  not  fail  to  involve  in  loss,  often  ex- 
cessive, one,  and  perhaps  both  parties  to  their  use  ?  And  yet 
this  is  precisely  the  condition  of  the  country  in  reference  to 
her  paper  money.  She  cannot  get  out  of  her  dilemma,  as  her 
hands  are  fast  tied.  Why  not,  for  the  future,  let  the  note- 
holders take  care  of  themselves  ?  Has  not  experience  shown 
that  they  are  as  competent  to  do  this  as  the  government? 
They  would  not  be  compelled  to  receive  the  notes  of  a  single 
Bank.  They  could  always  demand  to  be  paid  in  coin  at  the 
rate  of  bank-notes.  They  would  always  demand  to  be  paid 
in  it,  were  there  any  cause  for  distrust.  They  shoidd  always 
be  encouraged  to  exercise  a  distrust  of  bank-notes,  precisely 
as  the  managers  of  Banks  should  be  encouraged  to  exercise 
it  in  reference  to  bills  offered  for  discount.  Neither  notes  nor 
bills  should  be  accepted  until  a  case  had  been  made  out  in 
their  favor.  Mutual  distrust,  or  caution  rather,  is  the  essen- 
tial condition  of  all  sound  banking,  as  of  all  the  business 
operations  of  society.  If  note-holders  understand  that  they 
have  no  protection  but  the  capital  of  Banks  and  their  compe- 
tent management,  there  will  be  very  few  unsound  ones.  Why 
does  not  government  interfere  in  all  the  transactions  of  soci- 
ety ?  Why  does  it  not  say  to  a  builder  of  ships,  that  he  shall 
not  begin  the  construction  of  one  till  he  has  deposited  in  the 
Treasury  a  sum  equalling  the  value  of  the  ship  he  is  to  build, 
as  a  guarantee  that  he  will  discharge  all  obligations  contracted 
in  its  construction  ?  How  many  ships  would  be  built  under 
such  provisions  as  these  ?  Would  not  the  parties  who  were 
to  deal  with  the  builder  protest  against  them,  for  the  reason 
that  they  would  destroy  his  power  of  purchasing  their  mate- 
rials or  labor  ?  And  would  they  not  demand  that  he  shoidd 
be  left  with  his  means,  for  their  advantage  as  well  as  his  own  ? 
Would  any  one  purchase  a  bill  of  exchange,  were  he  told  that 


CONDITIONS   OF   RESUMPTION.  599 

it  might  not  be  paid  on  its  presentation,  but  that  the  equivalent 
therefor  had  been  provided  by  the  drawer  on  its  return,  not 
in  merchandise  but  in  securities  ?  Bills  are  used  in  foreio-n 
trade  to  serve  as  mone}^  They  will  not  be  purchased  if  they 
will  not  serve  as  such.  To  remit  one  that  might  not  be  paid 
might  involve  a  loss  far  greater  than  its  amount.  The  opera- 
tions of  commerce  and  trade  can  no  more  than  those  relating 
to  real  property  be  carried  on  by  instruments  severed  from 
their  proper  constituents.  The  purchaser  wants  the  specific 
thing  contracted  for,  not  some  other  which  may  have  no  rela- 
tion to  it.  To  require  drawers  of  bills  to  put  up  securities  for 
their  payment,  in  addition  to  the  merchandise  represented  by 
them,  would  be  to  abridge  commerce,  between  nations  or 
countries  widely  separated,  to  one-tenth  its  present  propor- 
tions. Purchasers  would  be  the  last  to  require  such  deposits, 
as  they  would  very  properly  infer  that,  to  make  them,  drawers 
had  been  compelled  to  divert  some  portion  of  that  which 
should  provide  for  their  bills.  So  with  the  notes  of  Banks. 
These  represent  their  bills.  By  means  of  the  former,  their 
holder  can  obtain  the  proportion  of  merchandise  for  which  they 
call.  He  does  not  want  an  interest  in  securities  locked  up  in 
Washington  ;  but  that  which  he  can  eat,  drink,  and  wear.  So 
far  as  the  bills  discounted  do  not  represent  merchandise,  the 
Banks  must  make  up  the  deficit  in  coin.  All  safety-fund 
Banks  are  constantly  liable  to  make  issues  which  do  not  repre- 
sent capital,  as  a  means  of  supplying  the  place  of  that  with 
which  they  parted  in  order  to  purchase  their  securities.  They 
are  taught  to  regard  the  notes  delivered  to  them  with  so  much 
ceremony  and  formality,  as  money  to  be  used  in  any  way  they 
choose.  Not  the  first  attribute  of  money  has  been  given  to 
them.  It  can  only  be  given  by  their  being  made  to  represent, 
in  the  discount  of  bills,  merchandise  which  will  be  certain  to 
retire  them  in  its  purchase  for  consumption.  It  is  impossible 
sufficiently  to  impress  this  fact  upon  the  issuers  of  a  currency 
created  by  safety-fund  Banks.  Hence  the  constant  disturb- 
ance and  disasters  arising  from  their  operations.  The  issuers 
of  a  currency  without  any  special  provision  for  its  redemj^tion 
are  not  liable  to  similar  temptations  and  mistakes.  They  see 
that  the  only  way  in  which  they  can  secure  circulation  for 
their  issues,  and  bring  them  back  without  loss  to  themselves, 
is  to  base  them  upon  capital  that  must  soon  be  taken  for  con- 


600      CURRENCY   AND   BANKING   IN  THE   UNITED    STATES. 

sumption.  An  unsecured  currency,  therefore,  is  much  more 
uniform  in  amount  and  value  than  a  secured  one,  and  conse- 
quently far  preferable.  The  losses  of  the  holders  of  the  unse- 
cured notes  of  the  New  England  Banks  during  the  continuance 
of  the  Suffolk  system  did  not,  in  ratio  to  their  amount,  equal 
one-tenth  those  of  the  holders  of  the  notes  of  the  New  York 
safety-fund  Banks.  Under  the  former,  from  its  efiBciency  in 
enforcing  constant  redemptions,  it  was  hardly  possible  that 
any  Bank  should  become  so  embarrassed  as  not  to  be  able  to 
provide  for  its  liabilities  out  of  its  means.  If  these  were  not 
sufficient,  the  stockholders  of  the  Banks  were  liable  to  an 
amount  equal  to  that  of  the  shares  held  by  them.  No  safety- 
fund  system  assumes  to  provide  security  for  deposits,  which  are 
currency  equally  with  notes,  and  by  means  of  which  Banks  are 
much  more  liable  to  become  embarrassed  than  by  means  of 
their  notes.  The  principle  of  security,  if  it  be  worth  any  thing, 
and  if  it  would  produce  its  proper  results,  should  apply  to 
both  kinds  of  currency.  It  is  not,  however,  either  from  notes 
or  deposits  that  the  greater  part  of  the  losses  incident  to  bank- 
ing operations  arise.  The  Bank  of  England  has  paid  specie 
on  all  its  liabilities  for  fifty  years  past ;  yet  its  action  may  have 
been  instrumental  in  promoting  enormous  inflations,  to  be 
followed  by  excessive  contractions,  in  consequence  of  which 
losses  have  been  caused  equalling  many  times  its  own  circula- 
tion. The  moment  the  issues  of  a  Bank  cease  to  represent 
merchandise  speedily  to  enter  into  consumption,  it  is  exerting 
a  disturbing  influence  on  affairs,  in  ratio  to  the  extent  of  its 
operations.  If  the  ordinary  instruments  of  distribution  were 
suddenly  destroyed,  the  loss  that  would  be  caused  would  ex- 
ceed tenfold  their  value.  If  these  be  the  notes  and  credits  of 
Banks,  a  great  inflation  and  subsequent  contraction  of  them 
will  often  result  in  losses  many  times  greater  than  the  whole 
circulation  issued.  It  is  in  this  way  that  nine-tenths  of  all 
the  losses  incident  to  or  caused  by  Banks  arise.  The  chief 
care,  consequently,  in  their  administration,  and  in  legislating 
in  reference  to  them,  is  to  guard,  not  so  much  against  losses 
occasioned  by  their  inability  to  meet  their  obligations,  as 
against  the  disastrous  influence  they  may  exert  over  prices, 
and  over  production  and  trade.  They  may  be  instruments  of 
immense  mischief  at  the  same  time  that  they  possess  means 
amply  sufficient  to  discharge  all  their  liabilities.     The  remedy 


SAFETY-FUND   SYSTEMS   RADICALLY   VICIOUS.  601 

can  come  only  from  systems  of  redemption  which  shall  imme- 
diately return  upon  all  the  Banks  every  issue  tliat  is  not 
employed  in  the  distribution  of  its  proper  constituents.  So  far 
as  the  public  is  concerned,  a  note  issued  hy  a  Bank,  based 
upon  an  United  States  bond,  produces  precisely  the  same  effect 
as  a  note  issued  in  the  discount  of  a  fictitious  bill.  It  serves 
not  as  the  instrument  of  distribution  for  a  corresponding 
amount  of  merchandise,  but  as  one  for  the  consumption  of 
an  equal  amount  of  accumulated  capital.  As  capital  so  sym- 
bolized is  not,  as  a  rule,  made  the  basis  of  reproduction,  there 
has  been  an  excess  of  expenditure  equal  to  its  amount,  with  a 
contraction  usually  far  more  excessive  than  was  the  inflation. 

A  safety-fund  system,  in  whatever  light  viewed,  is  radically 
vicious.  It  is  impossible  that  it  should  be  established  through- 
out the  United  States,  and  at  the  same  time  provide  a  currency 
that  will  not  be  either  deficient  in  amount,  or  inconvertible 
and  depreciated.  Our  present  national  system  would  never 
have  been  established,  had  Mr.  Chase  possessed  a  competent 
knowledge  of  the  laws  and  functions  of  money.  His  great 
theme  was  a  "credit  circulation,"  —  a  circulation  sustained  by 
faith,  not  by  works.  When  any  one  took  a  note  of  a  Bank 
created  by  his  system,  he  was  told  to  look  confidingly  toward 
Washington,  and  believe  that  locked  up  in  the  vaults  of  the 
Treasury  was  a  security  which  possessed  a  value  in  coin  equal 
to  all  the  notes  the  Bank  might  issue.  Suppose  the  holder 
did  not  want  a  government  security,  but  food.  Could  he  avail 
himself  of  the  former,  he  would  still  have  to  convert  it  into 
money,  which  could  only  be  effected  at  an  expense  and  loss  of 
time,  involving  a  loss  of  interest,  equalling  perhaps  two- 
thirds  the  value  of  his  note.  At  one  time,  since  the  safety- 
fund  notes  have  been  issued,  they  were  worth,  in  coin,  only 
about  one-third  of  their  nominal  value.  It  is  little  consolation 
to  be  told  that  Mr.  Chase  was  as  wise  as  his  time.  The  mis- 
fortune is  that  he  was  as  reckless  and  unscrupulous  as  he  was 
ignorant.  He  could  not  rest  till  he  had  hopelessly  involved 
the  whole  country  in  the  meshes  of  paper  money.  His  first 
achievement  was  the  establishment  of  an  inconvertible  cur- 
rency of  United  States  notes.  Upon  this  superstructure  he 
erected  his  safety-fund  system.  But  for  one,  he  could  not 
have  established    the  other.     By  means  of  the  former,  the 


602      CUEEES'CY   AXD   BA^*KLS'G  IN   THE   UNITED   STATES. 

Banks  were  practically  relieved  of  all  responsibility,  so  far  as 
concerned  their  note  circulation.  In  consideration  of  taking 
away  their  means,  he  provided  that  they  should  never  need 
them.  The  only  "way,  consequently,  in  which  they  can  provide 
for  their  liabilities  is  by  the  return  to  them  of  their  means.  To 
insist  upon  the  continuance  of  his  system,  is  to  insist  upon 
continued  suspension.  The  Banks  of  such  States  as  Io\ra  and 
Iklinnesota  cannot  be  permanent  lenders  to  government,  at  6 
per  cent,  to  an  amoimt  equalling  their  entire  capital,  and  have 
any  thing  left  to  be  loaned  to  the  public.  The  idea  is  prepos- 
terous. It  will  appear  so  to  every  one  who  has  emancipated 
himself  from  the  idea  that  money  is  a  fiction,  not  a  substance ; 
or  that  its  value  in  exchange  depends  upon  its  amount,  not 
upon  any  pro\i3ion  by  merchandise  or  coin  for  its  retirement. 
By  allowing  Banks  to  reclaim  their  bonds,  and  to  issue 
notes  for  the  future  without  any  further  provision  for  them 
but  their  capital  and  bills,  they  would,  for  the  first  time  since 
they  went  into  operation,  be  in  a  position  in  which  they  could 
resume.  They  would  then  eagerly  avail  themselves  of  the 
opportunity,  as  absolutely  necessary  to  the  preservation  of  their 
means.  All  of  them  must  see,  by  this  time,  that  every  day 
passed  without  resumption  is  seriously  impairing  their  value. 
Every  day  isithe  number  of  their  bad  debts  increasing.  Under 
the  present  system,  time  alone  is  wanting  to  complete  their 
ruin.  The  great  majority  of  them  are  now  indifferent  or  op- 
posed to  any  change,  only  for  the  reason  that  they  see  no  way 
out  of  their  present  condition.  Let  it  be  known  that  they 
can  get  back  their  securities,  become  State  organizations,  or 
issue  notes  as  National  Banks  without  any  deposit  therefor, 
and  the  great  majority  will  earnestly  set  their  face  toward  re- 
sumption. Until  they  move,  the  most  effective  step  in  this 
direction  will  remain  to  be  taken.  The  national  system  should 
be  got  rid  of  as  fast  as  possible.  The  greater  part  of  the  cur- 
rency is  always  to  be  furnished  by  local  institutions,  and  all 
such  should  be  under  local  supervision  and  control.  The 
work  of  the  central  government,  as  far  as  the  currency  is 
concerned,  should  be  at  an  end  when  it  has  created  an  United 
States  Bank. 

It  is  easy  to  point  out,  even  to  demonstrate  the  way.     WiU 
those  see  and  follow  it  who  are  charged  with  the  work  ?    Here 


ME.    SHF.F.MAX'S   SCHZ^IE   TOE   EESUiCPTION.  60-3 

lies  the  real  difficulty.  !Mr.  Sherman,  now  at  the  head  of  the 
Treasurv  Department,  sees  in  it  nothing  but  a  ceremonr.  He 
has  oidj  to  '•  salute  the  flag,"  and  the  thing  is  done  :  — 

'•  Nor  are  we  to  decide  whether  our  paper  money  shall  be  issued 
directly  by  the  government  or  by  B:mks  created  by  the  govern- 
ment ;  nor  whether  at  a  future  time  the  legal-tender  quality  of 
United  States  notes  shall  continge.  I  am  one  of  those  who  believe 
that  a  United  States  note  issued  directly  by  the  government,  and 
convertible  on  demand  into  gold  coin,  or  a  goTemment  bond  equal 
in  value  to  gold,  is  the  best  currency  we  can  adopt ;  that  it  is  to  be 
the  currency  of  the  future,  not  only  in  the  United  States,  but  in 
Great  Britain  as  well ;  and  that  such  a  currency  might  properly 
continue  to  be  a  legal  tender,  except  when  coin  is  specifically  stip- 
ulated for.  ... 

^  In  my  judgment,  the  real  solution  of  specie  resumption  will 
thus  come  through  the  volrmtary  act  of  National  Banks,  each  act- 
ing for  itself,  under  the  general  direction  of  the  law.  precisely  as 
the  Bank  of  England,  the  Bank  of  France,  and  the  New  York 
Banks  brought  about  and  maintained  resumption.  I  have  never 
regarded  with  solicitude  the  amount  of  United  States  notes  out- 
standing, for,  as  I  will  show,  they  can  be  easily  maintained  at  par 
in  gold ;  but  the  agency  of  the  Banks  in  securing  resumption,  and 
the  effect  of  resumption  upon  their  customers,  were  matters  of 
solicitude.  This  I  no  longer  doubt  or  fear.  The  whole  problem 
consists  in  a  partial  and  Umited  transfer  of  capital,  now  invested  bv 
National  B;inks  in  United  States  bonds,  to  individuals.  The  high 
price  of  these  bonds,  and  the  idle  capital  that  seeks  investment  in 
them,  will  enable  each  Bank  to  strengthen  itselt'by  a  s;\le  of  bonds, 
without  in  the  least  impairing  its  abihty  to  discoimt  or  loan,  .and, 
in  fact,  to  increase  its  power  to  do  so  ;  and  the  bonds  will  be  ab- 
sorbed by  the  increasing  demand  for  such  securities.  Strong  B:inks 
in  cities  do  not  need  the  currency,  for  their  currency  is  certified 
checks.  Their  currency  is  largely  held  by  them ;  or,  if  in  circulation, 
it  can  be  retired  and  c:mceUed  without  impairing  in  the  least  their 
ability  to  loan  or  discount.  The  B:\nk  currency  being  thus  dimin- 
ished, as  the  time  for  resumption  .approaches,  the  United  States 
notes,  supported  by  a  gold  reserve  and  the  power  of  the  Secretary 
to  sell  bonds,  wUl  easily  be  maintained  at  the  gold  standard,  and 
the  problem  is  solved. 

'•  This  p:irtial  contraction  of  Bank  currency  will  unlock  and  dis- 
sipate a  greater  contraction  which  has  gone  on  since  the  panic,  and 
will  go  on  until  the  public  mind  rests  assured  that  the  day  of 
resumption  is  not  only  promised,  but  rendered  certain  by  the  course 
of  events.  An  increase  of  currency  will  follow  resumption.  Great 
masses  of  notes  now  lie  idle  in  b:mk-vaults  and  in  the  Treasury,  .and 
are  hoarded  in  homesteads  all  over  the  land.  There  is  deposited  in 
the  Treasury,  without  interest  and  l>elonging  to  Banks,  Sol,005,000, 
represented  by  currency  certiticates.  There  are  now  in  the  vaults 
of  the  Natiomd  Banks  ;?7o,62C,100  United  States  notes  and  frac- 


604      CURRENCY  AND    BANKING   IN   THE   UNITED   STATES. 

tional  currency,  $17,166,190  bank-notes,  in  all  $90,792,290  ;  and  in 
the  Savings-Banks,  State  Banks,  and  other  Banks  that  have  made 
returns  to  the  Comptroller  of  the  Currency,  the  sum  of  $48,431,409  ; 
in  all  making  $170,228,699,  and  this  is  far  more  than  the  reserve 
required  by  law.  The  practice  of  hoarding  currency  has  greatly 
increased  from  the  day  of  the  panic ;  and  it  may  be  safely  said, 
that  there  is  among  the  people,  and  in  Savings-Banks  and  trust  com- 
panies, not  less  th^an  $200,000,000  of  currency  idle.  Nothing  but 
the  best  of  security  will  tempt  it  from  its  hiding-places ;  but,  that 
security  offered,  it  can  be  had  for  a  less  rate  of  interest  than  ever 
before.  Capital  met  its  periodical  shock  in  September,  1873 ;  and 
great  masses  of  it  (some  say  one  thousand  millions)  vanished  as  a 
dream,  and  are  now  represented  by  worthless  bonds,  bills,  notes, 
and  certificates  of  stock,  worth  but  little  more  than  the  paper  on 
which  they  are  printed.  This  panic  came  upon  us  when  the  paper 
god  was  lord  of  the  ascendant;  when  corner  lots,  at  fictitious 
prices,  were  the  par  of  exchange  ;  when  unproductive  railroads 
were  the  El  Dorados  of  visionaries,  and  wild  schemes  of  improve- 
ment, both  in  this  city  and  in  all  the  cities  of  the  Union,  increased 
municipal  debts  to  an  unexamjjled  degree.  This  reckless  inflation 
of  credits  collapsed  long  before  this  law  was  passed.  Money,  the 
agent  of  capital,  and,  when  idle,  capital  itself,  was  hoarded,  and  still 
remains  inactive,  or  is  loaned  on  call  or  unquestioned  security. 
This  is  the  contraction  of  which  so  many  complain.  It  is  not 
caused  by  the  Resumption  Act,  but  by  a  want  of  confidence  in  invest- 
ments that  offer.  Confidence  cannot  be  restored  by  a  repeal,  or  by 
issuing  more  paper  money.  But  the  occasion  does  offer  you  an 
oi^portunity  of  withdrawing  a  portion  of  this  idle  money,  and  thus 
reaching  a  specie  standard.  The  Banks  can  freely  surrender  a  por- 
tion of  their  circulation,  and  thus  be  strong  for  resumption  ;  while 
frightened  and  timid  capital  will  gladly  float  into  United  States 
bonds  when  sold  by  the  Banks.  Nothing  is  wanted  but  confidence, 
faith,  and  time,  to  secure  the  closing  triumph  of  our  war  policy,  by 
the  redemption  of  the  only  promise  we  then  made  that  has  not 
been  honestly  redeemed.  .  .  . 

"The  amount  of  United  States  notes  outstanding  to-day  is 
$370,943,392,  less  those  lost  and  destroyed.  Now,  many  who  fear 
resumption  suppose  the  whole  mass  of  United  States  notes  will 
then  be  presented  for  the  gold ;  and  they  have  counted  up  the 
number  of  tons  of  gold  that  will  be  required  to  do  it.  They  figure 
up  the  interest  at  5  per  cent  on  the  whole  sum,  and  state  that  as  an 
addition  to  our  annual  interest  account.  It  is  not  necessary  to 
reply  to  such  exaggerations  ;  nor  is  it  possible  to  state  with  precision 
what  amount  of  United  States  notes  would  circulate  at  par  in  coin. 
They  could  then  be  made  receivable  for  customs  dues,  without  a 
violation  of  the  public  faith.  They  will  always  be  the  reserve  of 
National  Banks.  They  could  then  be  made  receivable  for  bonds 
of  the  United  States.  They  could  be  supported  by  the  power  to 
sell  bonds  to  redeem  them.  They  would,  as  a  matter  of  course,  be 
supported  by  the  whole  gold  reserve  in  the  Treasury.  They  would 
take  the  place  of  certificates  of  deposit,  and  be  used  in  clearing- 
house exchanges.  .  .  . 


ME.  Sherman's  scheme  foe  eesumption.  605 

"  With  all  these  advantages,  with  the  growing  wealth  and  credit 
of  our  country,  I  do  not  believe  the  present  volume  of  United 
States  notes  need  be  largely  if  any  reduced,  to  keep  them  at  par  in 
coin.  We  have  now  a  gold  balance  in  the  Treasury  of  $37,120,772.73, 
and  a  currency  balance  of  $9,529,404  over  and  above  our  cur- 
rency and  coin  certificates.  It  is  true  this  balance  is  subject  to 
overdue  and  accruing  demands,  fully  stated  in  a  recent  letter  of  the 
Secretary  of  the  Treasury;  but  a  certain  amount  of  these  demands 
always  remain  uncalled  for,  and  when  presented  are  met  by  accru- 
ing revenue.  Suppose  (what  I  regard  as  an  extreme  case)  that  we 
add  to  this  reserve  $100,000,000,  —  fifty  million  in  coin  certificates, 
and  fifty  million  in  coin,  —  does  anybody  doubt  but  it  will  be  ample 
to  redeem  any  note  that  is  presented  ?  Confidence  being  once 
established  in  their  redemption,  and  who  will  want  the  gold  for 
them  ?  They  can  be  and  no  doubt  will  be  reissued,  without  or 
with  the  legal-tender  clause,  as  the  law  may  hereafter  provide  ;  and 
with  their  credit  secured,  established  at  par  in  coin,  they  will  not 
only  circulate  in  Texas  and  on  the  Pacific  slope,  as  well  as  in  other 
parts  of  the  United  States,  but,  like  the  Bank  of  England  note, 
in  all  countries  that  have  commercial  relations  with  us."  ^ 

Had  Mr.  Sherman  remained  in  the  Senate,  such  remarks 
v^^ould  have  been  passed  over  as  but  a  repetition,  after  the 
fashion  of  the  speaker,  of  the  incoherent  and  meaningless  talk 
which  is  the  burden  of  all.  The  Senator  has  now  become  the 
Minister  of  Finance,  charged  with  the  duty  of  conducting  the 
nation  out  of  the  perils  which  beset  it.  Upon  him  depends, 
very  largely,  whether  it  shall  be  carried  through  them,  or 
whether  it  shall,  by  the  inadequacy  and  absurdity  of  the 
method  to  be  adopted,  make  disastrous  shipwreck  of  all  its 
dearest  interests.  The  question  before  him  is  not,  as  he  per- 
sistently and  on  all  occasions  asserts,  the  maintenance,  with 
some  slight  modifications,  of  the  financial  system  of  the  country, 
but  a  revolution  as  radical  as  that  made  by  the  issue  of  the 
legal -tender  notes.  This  is  the  question.  It  is  not  one  that 
will  brook  delay.  Upon  the  answer,  if  he  be  to  remain 
Minister  of  Finance,  depends  whether  the  administration 
shall  be  a  success,  or  make  an  utter  and  disastrous  failure, 
in  a  matter  by  far  the  most  important  of  those  that  are 
to  engage  its  attention.  "  We  are  not  to  decide,"  he  says, 
"  whether  our  paper  money  shall  be  issued  directly  by  the 
government  or  by  Banks  created  by  the  government ;    nor 

1  Speech  of  Hon.  John  Sherman,  in  the  United  States  Senate,  March  6,  1876. 
Pamphlet  edition,  pp.  4,  16,  17,  20,  21. 


606      CUERENCY   AND   BANKING  IN  THE  UNITED  STATES. 

whether  at  any  future  time  the  legal-tender  quality  of  United 
States  notes  shall  continue."  The  only  question  for  decision 
is,  whether  government  or  Banks  shall  issue  our  pax3er  money. 
Governments  can  never,  or  will  never,  issue  a  convertible  one. 
This  has  been  demonstrated  over  and  over  again.  Banks, 
when  governments  do  not  enter  the  field,  will  issue  no  other. 
They  require  to  be  paid  in  coin,  as  the  only  mode  of  preserv- 
ing their  capital.  Their  note-holders,  for  the  same  reason, 
require  to  be  paid  in  coin  or  its  equivalent.  For  either  not  to 
require  that  which  may  be  due  them  in  coin  or  its  equivalent 
is  to  court  the  total  destruction  of  all  their  material  interests. 
Governments,  from  necessity,  make  their  issues  inconvertible  : 
Banks,  from  necessity,  make  theirs  convertible.  The  difference 
between  the  two  is  as  wide  as  the  poles.  They  are  as  unlike  as 
is  light  to  darkness,  truth  to  untruth,  something  to  nothing.  If 
nothing  be  equal  to  something,  then  we  are  not  called  upon  to 
decide  whether  government  or  Banks  issue  our  paper  money. 
If  nothing  cannot  equal  something,  then  the  first  question 
to  be  decided  is,  who  is  to  issue  this  money?  Neither," 
continues  Mr.  Sherman,  "are  we  called  upon  to  determine 
whether  our  currency  shall  be  plain  or  legal-tender  notes. 
Both,"  he  assumes,  "may  equally  be  made  to  circulate  as 
money."  It  has  been  already  shown  that  plain  notes,  not  con- 
vertible into  coin,  cannot  be  got  into  circulation,  much  less 
maintained  in  it.  Mr.  Chase's  attempt  to  issue  demand  notes, 
to  serve  as  money,  was  almost  the  only  one  in  history  ;  and 
the  suddenness  with  which  that  great  charlatan  was  brought 
to  grief  should  stand  as  a  warning  for  all  time.  Legal-tender 
notes,  by  being  made  competent  to  the  discharge  of  contracts, 
can  be  made  to  circulate,  though  possessing  no  intrinsic 
value.  If  governments  issue  a  currency,  as  they  will  never 
provide  the  means  for  its  conversion  previous  to  its  issue,  the 
kind  to  be  issued  is  not  a  matter  of  choice.  It  is  a  foregone 
conclusion.  The  Secretary  "  believes  that  a  United  States 
note  issued  directly  by  the  government,  and  convertible  on 
demand  into  gold  coin,  or  a  government  bond  equal  in  value 
to  coin,  is  the  best  cuiTency  we  can  adopt ;  that  it  is  the  cur- 
rency of  the  future."  Suppose  the  government  notes  now 
outstanding,  equalling  $360,000,000,  which  are  now  at  a  dis- 
count of  about  seven  per  cent,  be  made  convertible  into  bonds 
having  for  the  present  a  value  equal  to  that  of  coin,  what 


MR.  Sherman's  scheme  for  resu^siptiox.  607 

would  be  the  result  ?     In  place  of  the  notes  rising  to  par,  the 
bonds  would  fall,  say  to  95  per  cent.     The  effect  of  the  pro- 
vision, making  depreciated  notes  convertible  into  bonds,  would 
be  to  sink  the  value  of  the  latter  much  more  than  to  raise  that 
of  the  former.     It  would  be  simply  a  question  of  supply  and 
demand.     With  the  supply,  the  demand  would  fall  off.     The 
notes  might,  and  if  they  were  not  legal  tender  would,  be  eon- 
verted    into   the   bonds,  and   so  disappear ;   but  while   they 
remained  in  circulation  they  would  be  at  the  same  discount 
as  the  bonds.     In  ratio  as  they  disappeared,  both  bonds  and 
notes  would  rise  in  value.     If  they  were  plain  notes,  no  matter 
the  price  to  which  the  bonds  fell,  they  would  still  be  con- 
verted, for  the  reason  that  an  interest-bearing  security  would 
always  be  preferred    to  a   non-interest-bearing  one.     If  the 
notes  were  in  the  usual  form  of  those  serving  as  money,  this 
fact  would  have  no  influence  whatever  in  causing  them  to 
serve  as  such.     Their  price  would  be  their  real  or  estimated 
value.     If  the  bonds  into  which  the  notes  were  convertible 
were  at  a  premium  for  coin,  the  notes  would  be  at  a  corre- 
sponding one.     The  latter  would  derive  all  their  value  from 
the  former.     As  the  bonds  issued  by  the  most  stable  govern- 
ments are  always  fluctuating  in  price,  and  frequently  exces- 
sively, that  of  the  notes  made  convertible  into  them  would  be 
subject  to  precisely  the  same  fluctuations.     The  price  of  the 
bonds,  consequently,  would  become  the  standard   by  which 
all  the  transactions  of  a  nation  would  be  measured.     It  would 
not  only,  in  the  ordinary  course  of  events,  fluctuate  largely, 
but  it  could  be  made  to  fluctuate  excessively,  by  those  who 
were  strong^  enough  to  affect  the  credit  of  the  issuer.     The 
standard   of  value,    consequently,    might    depend    upon   the 
success  of  the  machinations  or  intrigues  of  the  unscrupulous 
and  powerful,  who  would  never  hesitate  to  sacrifice  the  pub- 
lic welfare  to  advance  their  own  selfish  ends.     It  would  be 
the  same  as  if  they  had  the  making  of  the  weights  and  meas- 
ures for  every  transaction  to  which  they  were  a  party.     Mr. 
Sherman's  best  currency,  consequently,  is  the  worst  one  that 
could  possibly  be  created.     The  alternative  is  that  established 
by  Providence,  the  quality  and  value  of  which  can  never  be 
impugned  by  any  artifice  or  contrivance.     No  one  of  ordinary 
sense  has  ever  lived  who  could  be  made  to  believe  that  it  was 
unsafe  to  hold  the  precious  metals  ;  while  the  fears  or  appre- 


608      CURRENCY   AND    BANKING  IN  THE    UNITED   STATES. 

hensions  of  the  most  sagacious  are  often  so  worked  upon  that 
they  eagerly  part  with  all  their  government  securities,  for 
fear  that  some  accident  or  event  may  weaken  or  destroy  their 
value  ;  perhaps  soon  to  lament  their  folly.  Mr.  Sherman  might 
at  any  moment  find  his  bonds,  created  for  the  purpose  of 
funding  his  notes  at  par,  at  a  discount  of  from  ten  to  twenty 
per  cent.  What,  in  such  case,  becomes  of  his  scheme  for 
maintaining  government  notes,  at  all  times,  at  the  value  of 
coin  ?  "  An  increased  currency,"  he  says,  "  will  follow  re- 
sumption." How  ?  By  bringing  into  circulation  1200,000,000 
of  currency  now  hoarded  by  the  people,  or  idle  in  Savings- 
Banks  and  trust  companies ;  $31,005,000,  deposited  in  the 
Treasury  and  represented  by  certificates  of  indebtedness ; 
$90,792,290  of  National  Bank  and  fractional  currency  now 
held,  and  largely  as  reserves,  by  the  Banks,  and  which  will 
go  into  circulation  when  specie  payments  are  resumed  (for 
gold  and  silver  will  then  take  their  place)  ;  and  a  part  of 
$48,431,409,  now  held  by  Savings,  State,  and  other  Banks. 
Deducting  from  this  last  sum  120,000,000,  as  held  by  the  Sav- 
ings-Banks,  which  in  Mr.  Sherman's  estimate  are  counted  twice, 
the  sum  which  is  to  come  into  circulation,  in  addition  to  the 
present  amount,  is  to  equal  $350,228,699 !  And  at  what  cost 
is  this  vast  sum  to  be  liberated  and  added  to  the  circulation  ? 
By  the  provision  of  $50,000,000  of  coin,  in  addition  to  that  in 
the  Treasury,  which  when  his  speech  was  made  equalled 
$37,120,772.  He  would  indeed  add,  by  borrowing,  $40,000,000 
of  gold,  for  which  he  would  be  authorized  to  issue  coin  cer- 
tificates, paj'-able  on  demand,  to  the  amount  of  $50,000,000 ; 
that  is,  for  $10,000,000  more  than  the  coin  borrowed.  The 
amount  necessary  to  be  provided  for  resumption,  consequently, 
would  equal  only  $40,000,000  ;  as  the  coin  which  was  borrowed, 
payable  on  demand  or  coin  certificates,  could  not  be  made  avail- 
able therefor.  The  $37,112,699  in  the  Treasury  could  not  be 
made  so  available,  for  the  reason  that  the  whole  amount  would 
be  required  for  the  payment  of  interest  on  the  government 
indebtedness,  unless  the  Independent  Treasury  were  abolished, 
and  a  United  States  Bank  created  to  take  its  place.  The 
United  States  notes,  after  resumption  on  Mr.  Sherman's  plan, 
"  could  be  made  receivable  for  customs  dues,  without  a  breach 
of  the  public  faith.  They  would  always  be  the  reserves  of 
the  National  Banks."     What  kind  of  notes  ?     Not  plain  notes, 


]vm.  Sherman's  scheivie  for  resij:siption.         609 

certainly,  as  these  could  not  be  got  into  nor  maintained  in 
circulation.  Plain  notes,  if  made  convertible  into  them,  would 
be  simply  orders  for  bonds,  which  would  be  executed  as  soon 
as  issued.  Such  notes  would  exert  no  influence  over  prices,  as 
they  would  not  serve  as  money.  Bonds  would  fall  in  ratio  to 
the  amount  of  notes  issued.  If  the  public  should  be  found 
indifferent  whether  they  held  interest  or  non-interest  bearing 
securities,  the  sooner  government  should  stop  the  payment  of 
interest  the  better.  It  is  assumed,  however,  that  the  historic 
preference  for  interest-bearing  securities  is  founded  in  reason, 
and  must  be  still  respected.  If  the  notes  were  legal  tender, 
then  they  would  be  at  a  discount,  for  the  reason  that  they  would 
be  instruments  in  excess  of  the  means  of  expenditure.  As  they 
would  not  be  convertible  into  coin,  how  could  government 
provide  itself  with  the  latter,  wherewith  to  pay  the  interest 
on  its  indebtedness  ?  By  selling  its  legal-tender  notes,  in 
which  its  revenues  would  be  collected,  in  the  market,  to  the 
highest  bidder.  With  one  or  two  sales  of  the  kind  it  would 
find  its  notes  at  fifty  per  cent  of  their  nominal  value.  How 
could  they  serve  as  reserves  of  the  Banks,  as  Mr.  Sherman 
asserts  they  always  would  ?  There  would  be  no  plain  notes  to 
serve  as  such,  as  they  would  not  be  money,  only  orders  for 
bonds.  The  latter  could  not  serve  as  reserves,  especially  after 
resumption,  as  these  would  have  to  be  in  that  form  of  capital 
whose  value  was  uniform  and  absolute.  If  the  notes  were  le^al 
tender,  their  reserves  would  be  in  that  which  would  always 
be  at  a  discount  compared  with  coin.  In  other  words,  so  long 
as  this  kind  of  reserves  was  used,  the  Banks  would  not  have 
resumed.  All  this  is  plain  enough,  if  any  distinction  is  to  be 
made  between  things  which  possess  value  and  those  which  do 
not.  Upon  this  distinction  turns  the  whole  question  of  money. 
Mr.  Sherman  declares,  in  substance,  that  there  is  no  difference 
between  reality  and  fiction.  His  great  factor  in  resumption 
is  "  confidence  "  !  That  secured,  "  who,"  he  triumphantly  asks, 
"  will  want  gold  for  the  notes  ?  "  That  secured,  "  the  present 
volume  of  United  States  notes  need  not  be  largel}^  if  any, 
reduced.  .  .  .  They  can  then,  and  no  doubt  will,  be  reissued, 
without  or  with  the  legal-tender  clause  ;  and,  with  their  credit 
secured  and  established  at  par  for  coin,  they  will  not  only 
circulate  in  Texas  and  on  the  Pacific  slope,  as  well  as  in  other 
parts  of  the  United  States,  but,  like  the  Bank  of  England 

89 


610       CURRENCY  AND   BANKING    IN   THE   UNITED   STATES. 

notes,  in  all  other  countries  having  relations  with  us."  There 
is  the  same  sense  in  all  this  as  to  say,  that  people  will  no 
longer  want  food,  when  they  know  they  can  have  it  for  the 
asking.  But  would  resumption  bring  an  additional  amount  of 
some  1350,000,000,  now  claimed  by  him  to  be  in  great  part 
hoarded,  into  circulation  ?  What  do  men  hoard,  and  why  do 
they  hoard  ?  They  hoard  only  the  liighest  kind  of  property,  — 
that  which  is  the  universal  equivalent,  —  not  the  lowest  kind, 
as  government  notes  often  are,  and  as  our  own  threaten  to  be. 
They  hoard  when  great  social  or  political  convulsions  are  immi- 
nent. Why  do  not  the  holders  of  the  government  notes  invest 
them  in  good  securities,  as  Mr.  Sherman  assumes  they  will  do 
after  resumption  ?  The  latter  are  as  valuable  now  as  they  will 
be  then.  This  talk  about  hoarding  is  the  idlest  of  tales. 
Resumption  would  not  bring  an  additional  dollar  of  currency 
into  circulation.  It  is,  however,  in  view  of  what  has  preceded, 
useless  to  comment  further.  His  assumptions  and  arguments 
are  too  puerile  and  absurd  to  deserve  the  least  notice.  They 
would  receive  none  but  for  the  fact  that  they  show  the  method 
by  which,  as  Minister  of  Finance,  he  proposes  to  conduct  the 
country  to  specie  pajanents.  The  alternatives  are  a  complete 
and  radical  change  in  his  views  and  policy,  or  certain  and 
terrible  disasters  to  the  country,  if  he  remain  in  his  present 
position.  To  resume,  every  dollar  of  government  notes  is  to 
be  taken  in  as  the  condition  precedent  thereto.  The  currency 
furnished  by  Banks,  including  deposits,  will  have  to  be  retired 
by  an  amount  equalling  probably  $300,000,000.  The  notes 
of  the  National  Banks  now  in  circulation  equal  that  sum  in 
round  numbers ;  their  deposits,  $650,000,000 ;  the  deposits 
of  the  State  Banks,  $159,000,000 :  making  an  aggregate  of 
$1,100,000,000.  It  is  very  doubtful  whether  resumption  can  be 
had  with  a  circulation  exceeding  $800,000,000.  This  sum  is 
nearly  twice  as  great  as  that  outstanding  on  January  1,  1860 ; 
and  probably  equals  the  amount  which  would  now  be  outstand- 
ing, at  a  normal  rate  of  increase  since  that  time. 

If,  as  is  demonstrable,  the  condition  of  resumption  be  the 
previous  retirement  of  currency  to  the  amount  of  $650,000,000, 
is  there  any  mode  by  which  the  vacuum  can  be  so  well  filled 
as  by  the  creation  of  a  National  Bank,  to  become  possessed  of 
the  specie  now  in  the  Treasury,  to  serve  as  reserves  for  its 
issues,  —  these  to  be  further  supported  by  being  made  receivable 


CONDITIONS   OF   RESUMPTION.  611 

in  the  payments  and  disbursements  of  the  revenues  ?     Is  there 
any  other  mode  by  which  even  the  first  step  can  be  taken, 
preserving  the  present  fabric  till  another  can  be  provided  in 
its  place  ?     If  such  mode  be  not  adopted,  the  new  can  only 
arise  out  of  the  ruins  of  the  old.     There  are  now  (June,  1877) 
in  the  Independent  Treasury  $108,137,083  in  coin  or  bullion,  — 
a  sum  sufficient  for  the  issue  of  a  convertible  currency  equal- 
ling three  times  its  amount.     Why  should  not  this  sum  be 
allowed  to  repeat  itself  three  times  its  amount  ?  for  with  the 
creation  of  a  Bank,  that  portion  of  it  represented  by  coin  cer- 
tificates, as  well  as  that  belonging  to  the  government,  will 
alike  go  into  it,  and  serve  as  reserves.     Would  not  every  one, 
government  and   people,  be  equally  benefited  ?     It  may  be 
urged  that  a  Bank  with  a  capital  of  $100,000,000  would  be  a 
great  and  dangerous  monopoly.     There  could  be  no  monopoly, 
no  matter  the  extent  of  its  operations,  as  it  would  supply  only 
a   small  proportion  of  the  currency.     The  Bank  of   England, 
which  enjoys  privileges  which  would  by  no  means  be  granted 
to  a  Bank  of  the  United  States,  does  not,  including  deposits, 
supply  one-tenth  that  in  use  in  that  country.     Where   the 
issue  of  a  currency  is  perfectly  free,  it  can  no  more  be  mono- 
polized by  one  institution  than  can  the   entire  capital  of  the 
country.     Currency  is  but  a  symbol  of  capital,  and  will  always 
have  in  this  country,  as  at  present,  thousands  of  issuers.    But 
suppose  all  the  currency  in  circulation  in  the  United  States, 
amounting  to,  say,  $1,000,000,000,  were  issued  by  a  single  in- 
stitution, would  the  public  safety  and  welfare  be  imperilled? 
What  would  be  its  position  ?     It  would  be  liable  to  be  called 
upon  at  any  moment  to  take  in  all  its  liabilities  in  coin,  while 
it  could  not  get  in  its  means  in  a  less  time  than  three  or  four 
months.     As  any  disturbance  or  distrust  might  drive  it  into 
suspension  or  bankruptcy,  it  would  be  compelled  to  observe  the 
most  scrupulous  moderation  and  justice  in  all  its  dealings.     Its 
advantage  would  be  promoted  in  the  degree  of  the  morality, 
social  order,  and  intelligence  which  prevailed.     It  would  seek 
to  promote  the  general  welfare,  as  the  surest  means  of  advanc- 
ing its  own.      Suppose   such    a  Bank   should  undertake,  as 
General  Jackson  asserted  the  old  Bank  undertook,  to  subvert 
the  liberties  of  the  country.     This  could  not  be  done  without 
a  revolution  which  would  involve  all  interests  —  those  of  the 
Bank,  as  well  as  of  the  country  —  in  common  ruin.     Is  it  cred- 


612      CURRENCY  AND   BANKING   IN   THE   UNITED    STATES. 

ible  that  it  would  court  its  own  destruction  ?  The  greater  its 
issues,  the  greater  the  guarantees  it  would  give  for  good  con- 
duct. Should  it  be  alleged  that  such  a  Bank  might  become 
the  instrument  of  oppression,  by  exacting  excessive  rates  on 
its  loans,  it  may  be  replied  that  exorbitant  charges  would 
greatly  reduce  its  operations  and  profits.  It  would  be  as 
much  for  its  advantage  to  make  loans  as  it  would  be  for  that 
of  the  public  to  borrow.  It  would,  like  merchants,  from  a 
wise  self-interest,  always  adopt  a  broad  and  liberal  policy. 
The  most  effectual  mode  by  which  the  latter  increase  their 
operations  and  profits  is  an  equitable  rule  of  conduct  toward 
their  customers.  None  so  fully  appreciate  the  fact  that  the 
highest  material  result  from  the  highest  moral  conditions. 
The  Bank  would  be  governed  by  merchants,  and  by  their 
methods  and  rules.  With  all  its  power,  the  Bank  of  England 
was  never  charged  with  demanding  exorbitant  rates  with  a 
view  to  profit.  No  similar  charge  was  ever  made  against  the 
Bank  of  France,  the  sole  issuer  of  notes  in  that  kingdom. 
But  a  monopoly  of  issue  in  such  a  country  as  the  United 
States  is  impossible.  If  it  were  possible,  as  the  borrower 
would  always  receive  the  value  of  his  loan,  the  only  oppres- 
sion could  come  from  being  compelled  to  make  payment 
according  to  its  terms.  The  assumption  of  oppression  arises 
from  the  idea  that  Banks,  in  making  loans,  do  not  part  with 
capital,  but  demand  it  in  their  payment.  It  is  from  such  an 
assumption  that  the  prejudice  against  Banks  and  bankers  has 
chiefly  arisen.  As  in  making  their  loans  they  lend  coin  or  its 
equivalent  in  merchandise,  they  wiU  take  nothing  in  exchange 
that  does  not  represent  coin  or  its  equivalent,  in  merchandise. 
They  will  discount  no  bills  the  means  for  the  payment  of 
which  are  not  provided  before  their  creation.  The  victims 
of  a  "  moneyed  monopoly "  are  borrowers  of  small  local 
capitalists,  not  issuers,  who  may  and  often  do  oppress  their 
debtors.  Banks  always  steer  clear  of  such  borrowers  as 
these.  They  not  only  cannot  oppress,  advancing  as  they 
do  capital  equalling  the  nominal  amount  of  their  loans, 
but  they  are  the  most  lenient  of  all  lenders,  for  the  reason 
that  the  failure  of  their  customers  may  so  disturb  public  con- 
fidence as  to  imperil  their  own  condition  ;  and  that  their 
managers,  who  are  usually  merchants,  have  always  a  deep 
sympathy  in   the  misfortunes   of  their  fellows,   and   always 


NECESSITY  FOR   A   UNITED   STATES   BANK.  613 

stand  ready  to  do  what  they  properly  can  for  their  relief. 
Monopoly  or  oppression,  therefore,  either  by  national  or  local 
institutions,  is  the  last  thing  to  be  feared.  The  assertion  of 
Jackson,  Benton,  Hill  and  others,  that  the  Banks  and  bankers 
of  the  country  were  in  league  against  its  liberties  and  welfare, 
was  the  natural  expression  of  the  hatred  cherished  by  ignorant, 
jealous,  and  vindictive  natures  against  those  of  whose  supe- 
riority they  were  painfully  conscious,  and  in  whose  overthrow 
they  found  some  compensation  for  their  wounded  vanity.  It 
is  to  be  hoped  that  the  era  of  such  men  is  for  ever  passed  ;  and 
that  the  subject  of  a  National  Bank  can  now  be  discussed  as  a 
financial,  not  as  a  political  or  personal,  question.  Virginia 
very  earnestly  and  very  naturally  opposed  the  old  Bank,  for 
the  reason  that  the  grounds  upon  which  it  was  created  might 
serve  as  a  precedent  for  an  attack  upon  her  cherished  insti- 
tution, to  which,  while  it  existed,  she  was  prepared  to  sacrifice 
every  other  consideration.  The  question  involved  in  the 
creation  of  the  Bank  —  the  powers  of  the  central  government 
—  brought  on  the  war  of  the  Rebellion,  in  which  her  ter- 
ritory was  devastated  by  contending  armies,  her  cities  sacked 
and  burned,  her  domain  dismembered,  her  great  institution 
wholly  overthrown,  and  her  "  Ancient  Dominion  "  reduced, 
from  the  proud  pre-eminence  it  had  so  long  enjoyed,  to  the 
rank  of  a  second-class  State.  For  doctrines  alike  subversive 
of  all  welfare  and  order,  she  wholly  turned  her  back  upon  the 
teachings  and  example  of  Washington  ;  to  which  not  only  she, 
but  the  nation,  must  return,  if  they  would  establish  on  this 
continent  an  empire  worthy  the  opportunity.  Virginia, 
stripped,  as  she  is,  not  only  of  wealth  but  of  means  for 
acquiring  it  at  all  commensurate  with  her  resources,  will 
welcome  an  institution  which  is  to  supply  the  place  of  the 
banking  capital  so  indispensable  to  her  welfare,  and  so  ruth- 
lessly swept  away.  What  is  true  of  Virginia  is  true  of  the 
whole  South.  One  hundred  years  have  elapsed  since  we  were 
a  nation,  and  that  section  of  the  countr}^  has  hardly  taken  the 
first  step  toward  the  promotion  of  her  real  welfare.  Up  to  the 
outbreak  of  the  Rebellion,  every  step  she  took  was  directly 
opposed  to  it.  She  is  only  beginning  to  enter  upon  a  period 
in  which  her  policy  is  to  be  in  harmony  with  her  liighest 
interests.  To  this  end  she  will,  as  fast  as  possible,  seek  to  rid 
herself  not  only  of  the  precedents,  but  of  the  memories,  of 
the  past. 


61-1      CUKRENCY  AND   BANKING   IN   THE   UNITED    STATES. 

The  object  of  this  work,  however,  is  not  so  much  to  pre- 
scribe methods  for  the  future,  as  to  state  the  laws  of  money  in 
a  manner  so  plain  that  every  person  of  ordinary  intelligence 
may  act  understandingiy  in  reference  to  any  measure  that  may 
be  proposed,  —  to  show  the  beneficent  influence  of  Banks ;  that 
those  entrusted  with  their  management  are  the  most  zealous 
upholders  of  a  free  and  upright  government ;  that  there  can 
never  be  a  monopoly  of  capital,  so  long  as  it  is  the  product  of 
industry  and  trade  ;  and  that  merchants  and  manufacturers 
may  safely  be  left  to  the  guidance  of  an  enlightened  self- 
interest,  with  the  certainty  that  the  manner  in  which  their 
ends  are  sought  will  always  be  in  harmony  with  the  public 
good.  When  such  a  degree  of  intelligence  is  reached,  it  may 
safely  be  left  to  the  people  to  decide  upon  the  methods  or 
institutions  they  will  summon  to  their  aid. 


APPENDIX. 


THE  QUESTION  OF  A  DOUBLE  STANDARD. 

The  principles  established  in  the  preceding  pages  afford  an  easy 
solution  of  the  question  of  a  double  standard. 

As  all  currencies  circulate  only  at  their  value,  the  cost  of  the 
standard  to  be  adopted,  whether  of  gold  or  silver,  will  always  be 
the  same.  Should  it  be  decided  to  establish  one  of  gold,  such 
silver  as  the  country  or  government  may  become  possessed  of  is  to 
be  converted,  at  its  cost  and  value,  into  gold.  The  silver  will  always 
be  convertible  into  gold  at  its  value  as  currency.  If  silver  is  to  be 
the  standard,  then  the  gold  that  is  to  come  into  possession  of  the 
country  or  the  government  is  to  be  exchanged,  at  its  value  as  cur- 
rency, for  a  corresponding  value  of  silver.  The  only  question  to 
be  considered,  therefore,  is  the  relative  convenience  of  the  two 
standards  :  — 

First :  Gold  will  be  the  most  convenient  standard,  as  its  value,  in 
ratio  to  its  weight,  is  at  least  sixteen  times  greater  than  that  of 
silver. 

Second  :  As  the  greater  number  of  commercial  countries  have 
adopted  gold  as  the  standai'd,  and  as  the  tendency  of  all  is  in  the 
same  direction,  the  United  States  must  folloAV.  As  nearly  all  ex- 
ports of  coin  from  this  country  are  made  to  England,  —  to  London, 
as  the  clearing-house  of  the  world ;  —  as  the  English  standard  is 
gold,  and  as  all  shipments  of  silver,  as  money,  to  that  country, 
must  be  monetized  in  it,  —  that  is,  converted  into  gold  before  it 
can  be  used,  —  all  foreign  nations  have  practically,  for  us,  adopted 
the  gold  standard.  Gold,  therefore,  is  the  standard  indispensable 
-^-y  for  us  to  adopt  in  our  foreign  commerce ;  if  so,  its  adoption  is 
*^  equally  indispensable  in  our  domestic  commerce. 

Third :  The  adoption  of  a  double  standard  will  end  in  a  single 
one,  unless  the  cost  and  value  of  the  two  metals  remain  perma- 
nently uniform.  There  is  no  probability  that  they  will  remain 
uniform.     The  value  of  silver,  from  the  excess  of  its  production 


616  APPENDIX. 

over  that  of  gold,  has  largely  fallen  within  a  few  years.  The  ten- 
dency is  still  in  the  same  direction.  Should  it,  as  well  as  gold,  be 
made  a  standard  at  the  present  value  of  each,  and  should  it  fall  in 
value,  the  effect  would  be  to  drive  the  more  valuable  standard 
out  of  the  market,  precisely  as  the  legal-tender  notes  drove  out 
metallic  money,  leaving  the  country  with  but  one  standard,  and 
that,  as  far  as  regards  other  nations,  a  debased  one. 

So  far  as  this  country  is  concerned,  therefore,  the  question  is  no 
longer  an  open  one.  There  being  no  difference  in  the  cost  of  the 
standards,  whether  gold  or  silver,  the  most  convenient  should  be 
the  one  adopted.  Gold  is  the  most  convenient,  in  domestic  as  well 
as  in  foreign  commerce.  It  is  the  only  one  in  which  foreign  debts 
and  balances  can  be  paid.  By  adopting  gold  as  the  sole  standard, 
in  all  suras  exceeding,  say  one  hundred  dollars,  our  reserves  will 
always  be  in  that  form  in  which  they  will  discharge  our  balances 
by  direct  exchange,  and  place  our  industi-ies  and  trade  on  an 
equality  with  those  of  other  nations.  Otherwise  we  shall  have  to 
convert  our  standard,  depreciated,  for  the  reason  that  it  is  excep- 
tional, into  that  common  to  other  nations  with  which  we  come  in 
contact,  upon  their  own  soil,  at  their  own  terms,  and  often  greatly 
to  our  injury.  Xo  possible  advantage,  but  great  disadvantage 
must  result  from  the  use  of  silver  as  a  standard.  This  being 
demonstrable,  the  question,  as  already  remarked,  is  not  even  open 
for  discussion. 

It  is  to  be  borne  in  mind  that  in  commercial  countries  the 
standard  of  value  is  no  longer  the  instrument  by  which  exchanges 
are  effected,  symbols  in  great  measure  taking  its  place.  In  England, 
the  currency,  including  deposits,  equals  nearly  $3,000,000,000, 
against  which  the  reserves  held  —  the  standard  of  value  —  do  not 
exceed  8200,000,000.  Upon  resumption  in  this  country,  the  propor- 
tion of  reserves  —  the  standard  of  value  —  will  be  about  the  same 
to  the  currency  issued.  Whatever  the  standard  adopted,  exchanges 
will  not  be  made  by  its  use,  but  at  its  value,  through  the  instru- 
mentality of  symbols.  The  amount  required  will  not  perceptibly 
affect  the  price  or  value  of  the  vast  mass  which  forms  the  stock  of 
the  world. 


APPENDIX.  617 


METHOD   OF  RESUMPTION.  —  AMOUNT  OF  SPECEE  REQUIRED. 

It  has  been  assumed,  in  the  preceding  pages,  that  the  United 
States  notes,  after  provision  of  a  Bank,  and  the  return  to  the  Na- 
tional Banks  of  their  securities,  are  to  be  demonetized  except  in  the 
discharge  of  contracts  entered  into  in  them ;  and  are  to  be  retired, 
not  by  payment  in  coin,  but  by  funding.  This  mode  of  getting  rid 
of  them  will  relieve  government  of  the  necessity  of  providing  a 
dollar  of  coin  on  their  account,  other  than  that  necessary  to  meet 
the  interest  annually  accruing  on  the  funding  bond. 

Neither  would  the  government  have  to  provide  a  dollar  of  coin, 
other  than  that  in  its  treasury,  to  place  itself  at  once  on  a  specie 
basis  in  all  its  future  operations.     It  never  can,  or  rather  never  will 
issue  a  convertible  currency,  for  the  reason  that  it  never  can,  or  never 
will  make  provision  for  its  conversion  — '•  the  necessary  condition 
of  all  convertible  currencies  —  previous  to  its  issue.     If  it  would 
conduct  its  operations  on  a  specie  basis,  using  paper  money,  it  must 
use  that  which  is  the  symbol  of  merchandise.     The  issue  of  such  a 
currency  is  never  one  of  its  functions.     It  is  to  aid  in  its   creation 
by  depositing  in  the  Bank  to  be  established  by  it  the  coin  of  which 
it  may  be  possessed  ;  by  making  such  Bank  the  depository  of  the 
public  moneys,  and  by  using  its  notes  in  the  collection  and  disburse- 
ment of  the  revenues.     Should  the  coin  in  its  possession  not  prove 
adequate  for  the  reserve  of  the  Bank,  the  stockholders  could  readily 
supply  what  was  wanting.     By  such  means  provision  could  at  once 
be  made  for  the  issue  of  a  convertible  currency  to  the  amount  of 
$300,000,000,  a  portion  of  which  should  be  got  into  cii-culation  as  the 
first  step  in  the  process  of  resumption.     The  government,  as  a  nec- 
essary condition  thereto,  must  unite   its  financial  operations  with 
those  of  the  people.     It  must  abolish  the  Independent  Treasury,  or 
so  much  of  it  as  jjrovides  for  the  collection  and  disbursement  of  the 
revenues  in  coin.    This  institution  was  established  as  an  act  of  hos- 
tility to  the  commercial  classes ;  and  to  destroy,  as  far. as  possible, 
the  paternal  character  of  our  government.     If  a  Bank  could  be  cre- 
ated to  exist  for  twenty  years,  the  necessary  inference  was  that  the 
government  erecting  it  should  at  least  exist  twenty  years,  to  give  the 
proper  efficacy  to  its  act.    If  the  government,  as  was  the  theory  of 
those  administering  it,  could  be  dissolved  at  any  moment  by  the  seces- 
sion of  any  member  of  it,  —  that  is,  of  any  one  of  the  States,  — noth- 
ing could  be  more  absurd  than  an  act  wholly  opposed  to  such  a 


618  APPENDIX. 

theory.  It  was  to  have  no  entanglements  that  could  not  be  resolved 
at  an  hour's  notice.  If  the  necessity,  or  reason,  that  led  to  the  creation 
of  the  Independent  Treasury  has  ceased,  the  thing  itself  should 
cease.  The  British  government,  using  nothing  but  paper  in  its 
operations,  which  far  exceed  in  amount  those  of  our  own,  is  on  a 
specie  basis  by  means  of  Bank  of  England  notes,  in  which  all  its 
revenues  are  collected  and  disbursed.  Whatever  coin  it  wants,  it 
draws  from  the  Bank.  Our  mode  of  collecting  the  revenues  in  coin 
is  worthy  only  of  such  countries  as  Turkey  or  Morocco,  in  which 
no  form  of  money  but  that  of  coin  is  trusted.  If  the  people,  by 
supplementing  coin  by  symbols,  make  a  saving  equal  to  the  interest 
on  a  corresponding  sum,  — conducting  their  operations,  at  the  same 
time,  with  vastly  greater  convenience  and  safety,  —  then  government 
would,  by  imitating  their  example,  make  a  similar  saving,  with 
equally  increased  convenience  and  safety  in  its  own. 

It  is  assumed  that  the  government  is  to  retire  its  notes  by  fund- 
ing. At  what  price  or  rate  ?  At  that,  in  each  case  if  possible,  at 
which  all  outstanding  conti'acts  vrere  entered  into.  This  is  not 
possible.  It  must  adopt  one  rate  for  all ;  and  that  must  be  the  one 
at  which  the  greatest  number  were  entered  into.  Such  a  rate  can 
be  sufficiently  approximated  to  do  substantial  justice,  not  in  all 
cases,  but  in  the  aggregate.  The  creditor  classes  earnestly  objected 
to  the  issue  of  the  legal-tender  notes,  for  the  reason  that  they  were 
compelled  thereby  to  receive,  in  the  payment  of  their  debts,  a  less 
value  than  was  contracted  to  be  paid.  Great  numbers  were  paid  in 
notes  whose  value  did  not  equal  one-half  their  nominal  amounts. 
Their  remonstrances  were  treated  with  contempt.  They  received 
no  sympathy  in  their  losses,  as  it  was  assumed  they  had  a  plenty  left. 
It  is  equally  a  hardsliip  for  debtors  to  be  compelled,  by  an  advance 
in  the  value  of  the  currency,  to  pay  a  greater  value  or  sura  than 
was  contracted  to  be  paid,  as  it  was  for  creditors  to  be  compelled  to 
receive  less.  As  the  creditor  must  accept  the  notes,  whatever  their 
value,  so  a  debtor,  after  they  have  driven  coin  out  of  circulation, 
can  contract  in  no  other  currency.  The  value  at  which  contracts 
are  entered  into  is  always  assumed  by  both  parties  to  be  the  value 
at  which  they  are  to  be  discharged.  So  accustomed  have  the  race 
become  to  regard  uniformity  of  value  as  a  necessary  attribute  of 
money  that  it  never  occurs  at  the  time,  to  parties  to  contracts,  that 
they  are  to  receive  or  pay  any  other  than  the  present  value  of 
money,  any  more  than  it  does  that  the  scales  or  weights  by  which 
they  buy  are  to  differ  from  those  by  which  they  are  to  sell.  Were 
the    measures   of   extension   or  quantity  liable  to  be  different  in 


APPENDIX.  619 

every  transaction,  it  would  not  be  long  before  society  would  be 
thoroughly  demoralized,  morally  as  well  as  materially.  By  the 
use  of  measures  of  value  —  United  States  notes  —  which  fluctuate 
constantly,  and  often  excessively,  the  people  are  in  the  same 
position  that  they  would  be  were  the  former  never  two  days 
alike.  They  are  demoralized  morally  as  well  as  materially.  Re- 
covery can  only  come  from  the  substitution  of  the  true  for  the 
false,  —  of  the  measures  of  value  established  by  Providence  in  place 
of  those  established  by  man. 

Relief,  so  far  as  it  can  be  administered,  must  be  general,  not  par- 
tict^lar.      If   varying   measures    of   extension  were  in  use,  and  it 
were  attempted  to  bring  all  outstanding  transactions  to  one  stand- 
ard, the  only  equitable  mode  would  be  to    ascertain  the  length, 
(the  denomination  being  the  same),  of  that  by  which  the  greater 
number  of  engagements  were  entered  into,  and  adopt  that  as  the 
standard  for  all.      So  with    varying    measures    of    value.       That 
which    is    to   be    adopted   for  all  must  be  the  one  at  which  the 
greater   number   of   outstanding    transactions  were    entered  into. 
Great   injustice  will    be    done   by  any  plan;  but  the  lesser  good     , 
must  be  sacrificed  to  the  greater.     The  issue  of  the  notes  at  the  '^|f^"^-C\.-, 
outset  was  an  immeasurable  crime,  for  which  the  appropriate  pen-'^r^t^  ^  .^ 
alty  had  to  be  paid,  —  and  has,  in  part,  been  paid  the  present  year,  in 
the  terrible  strikes  upon  our  railroads,  and  in  the  frightful  loss  of 
life  and  property  which  they  involved.     These  are  warnings  that 
the  reformation  of  our  currency  is  not  to  be  postponed  a  moment 
longer.      Not  only  is  its  reformation  the  prime  condition  of  the 
material  recovery  of  the  country,  but  of  the  maintenance  of  domes- 
tic order  ;  of  the  public  faith  in  engagements  other  than  the  gov- 
ernment   notes ;  —  nay,   of  the    existence  of    government    itself. 
Fortunately,   the  period   immediately  preceding  the   present  has 
been  the  longest  in  which  the  value  of  the  legal-tender  notes  has, 
since  their  issue,  continued  very  nearly  uniform.     Such  value,  con- 
sequently, is  the  one  in  which  the  greater  number  of  outstanding 
contracts  were  intended  to  be  paid.    It  must  be  adopted  as  the  one  at 
which  all  are  to  be  paid.     Commercial  undertakings,  which  always 
make  up   a  considerable  portion  of  those  outstanding,  are  entered 
into  and  run  off,  at  least  three  times  each  year :  these,  consequently, 
are  upon  the  present  basis  of  value  of  the  notes.     If  they  can  be 
carried  out  in  the  spirit  in  which  they  were  entered  into,  resump- 
tion will  be  attended  with  comparatively  little  loss  or  disturbance. 

The  value  of  the  currency  at  Avhich  contracts  are  to  be  dis- 
charged being  determined,  either  by  assuming  its  value  as  it  stood 


620  APPENDIX. 

on  the  first  day  of  July,  1877,  or  by  taking  the  average  for  the 
year  preceding,  then  provision  is  to  be  made  for  funding  at  such 
value  ;  the  equivalent  being  a  bond  having  a  long  time  to  run, 
and  bearing  interest,  in  coin,  at  the  rate  of,  say,  4  per  cent. 
Such  a  mode  of  adjustment  would  be  equitable,  and  satisfactory 
to  creditors,  as  it  would  secure  to  them  all  to  which  they  were 
entitled.  It  would  wholly  relieve  government  of  the  burden 
pressing  upon  it.  It  would  be  just  and  satisfactory  to  the  indebted 
classes,  as  it  would  compel  them  to  pay  no  more  than  they  con- 
tracted to  pay.  It  would  silence  the  only  objection  to  resumption 
which  is  well  founded.  While  government  or  society  may  outrage 
the  creditor  classes  with  impunity,  they  cannot  the  debtor.  The 
despoiling  of  the  former  excites  little  sympathy,  for  tTTSTrrfson  that 
they  are  assumed  to  be  above  want :  that  of  the  poor  may  take 
away  their  very  means  of  existence.  However  much  may  be  taken 
from  the  rich,  they  still  have  enough  left  to  render  indispensable 
the  maintenance  of  social  order  :  its  maintenance  by  those  who 
have  nothing  to  lose  may  become  a  matter  of  indifference.  Hence, 
the  complaints  of  the  latter  must  be  listened  to,  and  their  griev- 
ances redressed,  although  a  deaf  ear  may  be  turned  with  impunity 
to  those,  equally  well  founded,  of  the  rich.  The  latter  will  be  well 
content  with  the  plan  proposed,  as  the  alternative  might  leave 
them  wholly  without  remedy,  so  far  as  the  debts  due  them  are  con- 
cerned. By  the  mode  of  adjustment  indicated,  the  government 
would  be  liable  to  no  charge  of  bad  faith,  for  the  reason  that  it  is 
impossible  to  reduce  its  faith,  depending  upon  its  "  pleasure,"  to 
any  definite  quantity  or  value.  It  may  execute  its  "  pleasure " 
whenever  it  chooses  :  the  holder  of  the  notes  must  fix  his  own  time 
at  which  it  Avill  be  executed.  If  his  estimate  as  to  time  be  wrong, 
he  has  no  one  to  blame  but  himself.  It  was  expected,  when  the 
notes  were  issued,  that  the  "  pleasure  "  of  the  government  would  be 
speedily  executed;  the  notes,  consequently,  bore  a  high  price.  Fif- 
teen years  have  elapsed,  and  government  is  still  awaiting  the  time 
at  which  it  may  find  itself  able,  or  find  it  convenient,  to  pay  them. 
No  one  charges  it  with  bad  faith ;  although,  had  it  been  known 
at  the  time  of  issue  that  fifteen  years  would  elapse  before  they 
were  paid,  they  would  not  have  produced  one  quarter  their  nominal 
value.  Government  will  not  be  properly  chargeable  with  bad  faith, 
if  it  does  not  pay  them  within  fifteen  years  from  the  present  time. 
It  is  this  uncertainty  as  to  the  value  of  the  notes,  dependent  upon 
the  "pleasure"  of  the  government,  that  causes  them  to  fluctu- 
ate so  constantly  in  value.     Should  it  declare  its  "  pleasure  "  by 


APPENDIX.  621 

providing  for  their  funding  into  bonds  having  one  hundred  years 
to  run,  bearing  a  certain  rate  of  interest,  then  a  vahie  which  was 
before  Avholly  conjectural  becomes  ascertainable  and  measurably 
uniform.  The  notes  would  have  the  value  of  that  into  which 
they  would  be  convertible,  whatever  that  might  be.  At  any  rate, 
government  would  have  done  all  in  its  power  to  give  its  notes,  so 
long  as  they  reniained  outstanding,  the  attribute  of  uniformity; 
and  all,  in  fact,  that  it  can  undertake  to  do. 

Were  the  government  to  undertake  to  discharge  its  notes  in  coin, 
it  could  not  resume  till  they  were  wholly  provided  for.  They 
would  go  out  of  circulation  as  fast  as  provision  was  made  therefor. 
As  only  a  comparatively  small  amount  of  the  coin  by  which  they 
were  taken  in  would  go  into  circulation,  the  country,  by  their 
retirement  by  payment  in  coin,  would,  for  a  time  at  least,  be  virtu- 
ally withoiit  a  currency.  By  provision  for  the  retirement  of  the 
notes  by  funding,  government  would  have  in  effect  resumed  at  the 
same  time  that  they,  or  the  greater  portion  of  them,  would  still  be  in 
circulation,  by  virtue  of  being  money —  legal-tender  —  so  far  as  all 
outstanding  contracts  were  concerned.  They  would  be  money  to  a 
part  of  the  community  ;  and  capital,  for  funding,  to  another.  Those 
not  in  debt,  and  who  preferred  an  interest  to  a  non-interest  bearing 
security,  would  fund.  But  funding  would  not  go  on  long  before 
the  notes,  as  money,  would  j^i'oduce  to  their  holders  a  greater  rate 
of  interest,  on  loans  of  them,  than  that  of  the  funding  bonds.  Fund- 
ing would  then  cease,  till  money  became  easy  by  the  running  off  of 
outstanding  contracts ;  when  it  would  again  begin,  to  be  again 
checked  in  the  manner  already  stated.  In  this  way,  the  notes  would 
go  out  of  circulation  only  very  gradually,  and  as  the  new  convert- 
ible currency  came  in  to  take  the  place  of  the  old.  The  public  would 
never  be  without  a  sufficient  amount  of  currency  in  some  form, 
wherewith  to  carryforward  its  operations ;  and  would  escape,  as  far 
as  possible,  those  convulsions  almost  inseparable  from  all  great 
changes  in  financial  or  monetary  conditions. 

It  is  assumed  that  the  $100,000,000  of  coin  to  constitute  the 
reserves  of  an  United  States  Bank  could  be  readily  provided,  by 
means  of  which  the  government,  and  such  of  the  public  as  were  able, 
could  place  themselves  immediately  upon  a  specie  basis.  It  is  also 
assumed  that  the  securities  of  the  Banks  composing  the  present 
safety-fund  system  are  to  be  returned  to  them,  for  the  purpose  of 
providing  the  means  for  resumption ;  that  they  are  to  remain 
National  or  become  State  Banks,  at  theii*  option  ;  and  that  no  other 
than  the  ordinary  restrictions  are  to  be  imposed  upon  their  issues. 


622  APPENDIX. 

Such  provisions  would  not  only  give  the  greater  part  of  them  the 
means  of  resumption,  but  very  large  amounts  in  addition.  It  is 
also  assumed  that  the  whole  amount  of  circulation,  including  de- 
posits outstanding  iipon  resumption,  will  not  exceed  $800,000,000; 
requiring  reserves  of  say  $200,000,000,  of  which  one  half  will  be 
held  by  the  United  States  Bank.  As  already  remarked,  the  con- 
vertible currency  of  the  Banks,  as  it  comes  into  circulation,  will 
for  a  considerable  time  be  largely  supplemented  by  the  government 
notes,  which,  being  still  legal  tender  in  the  discharge  of  outstanding 
contracts,  will  go  out  of  circulation  only  as  such  contracts  are  run 
off.  The  rapidity  with  which  the  notes  are  funded  will  depend 
largely  upon  that  with  which  the  new  convertible  money  will  come 
into  circulation  :  the  removal  of  all  apprehension  on  the  score  of  the 
lack  of  circulation  will  go  far  toward  carrying  the  country  in  safety 
from  one  system  to  the  other. 

But  to  resume  upon  any  thing  like  an  adequate  basis  for  the 
whole  country,  vastly  more  is  required  than  what  appears  to  be 
ample  reserves  for  the  Banks.  There  is  the  same  reason  why  the 
public — consumers  of  merchandise  —  should  hold  reserves  in  coin 
as  that  Banks  should.  The  latter  are  little  more  than  instruments 
arising  out  of  production  and  distribution.  Should  their  reserves 
prove  inadequate,  or  be  too  largely  drawn  upon,  as  in  case  of  a 
heavy  export  demand,  they  must  strengthen  themselves  by  drawing 
coin  from  the  public,  whose  excessive  expenditures  have  been  the 
cause  of  the  export.  They  may  have  no  other  mode  of  strengthen- 
ing themselves,  and  at  the  same  time  of  checking  a  prevaiHng  ex- 
travagance, but  by  compelling  tlie  public  to  pay  their  bills  in  coin, 
which  they  can  do  by  ceasing  to  make  loans.  As  their  issues,  by 
means  of  which  their  bills  were  ordinarily  paid,  ceased,  the  latter 
would,  in  part  at  least,  have  to  be  paid  in  coin.  Banks  are  never 
in  a  secure  position,  unless  they  have  a  large  fund  to  draw  upon 
other  than  that  in  their  vaults.  The  public  are  never  in  a  safe  con- 
dition unless  such  fund  exists,  which  is  to  make  good,  on  their  part, 
any  deficit  of  pi-oducts,  the  ordinai-y  subjects  of  consumption,  A 
perfect  equilibrium  between  production  and  consumption  is  im- 
possible. Balances  will  be  constantly  arising  to  be  discharged  in 
coin,  for  which  Banks  should  not  be  called  upon,  or,  if  called  upon, 
should  be  able  to  reimburse  themselves  from  those  against  whom, 
from  extravagance,  or  want  of  production,  they  were  found.  To 
resume  with  safety,  an  amount  of  coin,  chiefly  gold,  should  be  in 
the  hands  of  the  public  equal  to  that  in  the  hands  of  the  Bank,  or, 
say,  1400,000,000  in  all.     With  the  means  that  will  come  into  the 


APPENDIX.  623 

possession  of  the  Banks,  and  with  the  products  of  our  industries, 
the  necessary  amount  of  coin  for  resumption  could  be  provided 
with  all  the  dispatch  consistent  with  our  highest  welfare  :  for  it 
should  be  our  aim  to  resume  without  causing  any  disturbance  in 
those  countries  which  are  the  great  consumers  of  our  products, 
which,  and  not  our  public  securities,  should  supply  the  means.  When 
our  people  move,  the  danger  will  be  that  they  will  move  with  too 
great,  instead  of  with  too  little  emphasis.  The  haste  should  be  in 
adopting  a  competent  method.  The  moment  it  is  entered  upon, 
there  will  be  no  complaint  that  it  is  not  sufficiently  rapid.  It  is 
far  better  to  take  time,  to  proceed  slowly  and  metliodically ;  to  rest 
occasionally  on  what  is  achieved,  than  to  run  the  risk,  by  incon- 
siderate haste,  of  losing  all. 


Cambridge  :  Press  of  John  Wilson  &  Son. 


-J^ 


UNIVERSITY   OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


JUN2  3  ^W 


K 


tM» 


JUL  <!  9  1988 

FEB  0  1 W 


Form  L9-32m-8,'57  (.0868084)444 


Ul   ■-^AlBiai.A.mCT 


B'iiJk.'A  a  m  II 11 J  XI  E^l  1 B  MHJ'^ 


d^ 


3  1158  01274  8322 


ir' 


r-itisfsisrf  £ 


,ESOUTHERf\l  REGIONAL  LIBRARY 


FACILITY 


AA    000  710  420    1 


I 


AlR 


rin^ 


I     U 


:t 


I  .  .    t '  I !  i  . 


